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An ETF With Emerging Markets Compensation

March 5, 2019 4:01 pm
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An avenue for conservative investors looking to participate in the emerging markets trade is via dividend exchange traded funds. Entering Monday, the WisdomTree Emerging Markets High Dividend Fund (NYSE:DEM) was up 8.39 percent this year.

DEM, one of the oldest and largest emerging markets dividend ETFs, focuses on high-yielding companies hailing from developing economies.

What Happened

This year, the $2.16 billion DEM is benefiting, in part, from rising oil prices. The fund allocates just over 16 percent of its weight to Russian stocks, more than quadruple the Russia weight found in the MSCI Emerging Markets Index.

Oil prices matter “a lot to major oil-exporting countries (like Russia), and not nearly as much to others that are more import-focused (like India),” said WisdomTree in a recent note. “For the full year (2018), Brent Crude oil fell from about $67 per barrel to about $54—a 20% drop. During the year, the price rose all the way to levels above $85, and then proceeded to drop to almost $50. To say the least, oil’s volatility was a major factor affecting global markets beyond just those in emerging markets.”

Disclosure: The author owns shares of DEM.

Why It's Important

DEM features exposure to 18 emerging markets, but over 48 percent of its geographic exposure goes Taiwan and China, which makes because those markets, along with Russia, have some of the sturdiest dividend track records in the emerging world. The fund's commodities exposure, particularly oil, is impactful for investors.

“The WisdomTree Emerging Markets High Dividend Index is designed to focus on the highest-yielding dividend payers in emerging markets that generate the largest cash dividends,” said WisdomTree. “Brazil and Russia have been large exposures in recent years. The Energy sector has also been outsized, as a significant over-weight relative to the MSCI Emerging Markets Index in recent years.”

Brazil, South America's largest economy, accounts for 4.45 percent of DEM's weight compared to 7.37 percent in the MSCI Emerging Markets Index.

What's Next

Passive has its perks. If DEM was an actively managed funds, it probably would have pared its energy and Russia exposures at the end of last year. Good thin it is a passive ETF.

“The WisdomTree Emerging Markets High Dividend Index was significantly over-weight in the Energy sector and Russia as a country compared with the MSCI Emerging Markets Index,” said WisdomTree. “This happened because companies in the Energy sector and in Russia had high-dividend yields and paid massive cash dividends. Thankfully, not one ounce of this depended on human foresight, which likely would have tried to get out of Russia or Energy, among the top-performing places to be during 2018 in emerging markets.”

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