Smaller Could Be Better With Emerging Markets
Just a few trading days remain in 2015, and there is a plethora of adjectives with which to describe the performances of emerging markets stocks and exchange-traded funds. None of those adjectives are positive, leaving investors to identify the emerging markets ETFs that have been less bad this year in effort to find potential rebound candidates for 2016.
One of the more compelling (and familiar) in favor of emerging markets stocks and ETFs has been low valuations.
"Per Research Affiliates’ expected return data, emerging-markets stocks (as represented by the MSCI Emerging Markets Index) had the highest expected returns of any major asset class as of the end of September. Research Affiliates’ data also show the current Schiller P/E ratio for emerging-markets stocks, at 11, its lowest level ever, and well below its median value of 19," according to a recent Morningstar research note.
Although U.S. investors are accustomed to small-caps here being more richly valued than large-caps, but in the developing world, there is value in smaller stocks. Those stocks can be accessed with the WisdomTree Emerging Mkts Small Cp Div Fd (NYSE: DGS). DGS has slightly trailed the MSCI Emerging Markets Index this year, but the WisdomTree ETF has been less volatile than the emerging markets benchmark.
A Peek In On DGS And Its Index
“Within emerging market small caps we focus on dividends, and the WisdomTree Emerging Markets SmallCap Dividend Index (WTEMSC) seeks to provide broad exposure to small-cap dividend payers in emerging markets while maintaining sensitivity to valuation.
“WTEMSC screens by size capitalization and then weights by dividends, thereby focusing on small-cap value. Compared to the MSCI Emerging Markets Small Cap Index, WTEMSC provides a dividend yields advantage of more than 207 basis point (bps) and sells at a 16.7 percent discount on a price-to-earnings (P/E) ratio basis,” said WisdomTree in a recent research note.
DGS has a whopping 7.5 percent distribution, which is well in excess of any U.S. small-cap ETF, dividend or otherwise. The WisdomTree fund allocates just over 44 percent of its weight to Taiwanese and Chinese stocks. Those are sensible allocations because Taiwan has one of the most favorable dividend policies in the developing world, while China is the largest emerging markets dividend payer in dollar terms.
The ETF recently increased its exposure to some under-performing emerging markets, including Brazil and China. Conversely, South Korea, one of this year's steadier/less bad emerging markets, has seen its weight in DGS reduced.
“As a result of the change, the largest country increase for WTEMSC was China with 14.4 percent in added weight. There were 102 additional companies eligible for inclusion, and they earned a 14.5 percent weight based on their Dividend Stream® at the rebalance.
“An additional 58 Chinese companies earned an additional 8.8 percent weight, bringing the Chinese representation to 160 securities, making up 23.3 percent of the Index. Brazilian small caps saw a slight additional increase in weight, primarily as a result of their poor relative performance over the past year, which contracted more than their dividends,” said WisdomTree.
From 2009 through 2014, DGS outperformed the two largest emerging markets in four of those six years.
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