Dividends, no Deficits on the Cheap in This EM ETF
October 4th, 2013 at 3:08pm by Tom Lydon
The WisdomTree Emerging Markets Equity Income Fund (NYSEArca: DEM) is a diversified emerging markets ETF. That means it competes with the likes of the large and popular Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) and the iShares MSCI Emerging Markets ETF (NYSE: EEM).
Competing with those ETFs does not make DEM a carbon copy of its rivals. In fact, the $5 billion DEM has some traits that make it easy distinguished from its counterpart. One of those traits should be prized by investors in the current environment for emerging markets equities: Solid exposure to countries that do not have current account deficits.
“So much of what has happened this year with emerging markets is macro-driven,” said WisdomTree Research Director Jeremy Schwartz in an interview with ETF Trends at the Morningstar ETF Invest Conference in Chicago. “Current account deficits have been the top macro issue for countries like Brazil, India, Indonesia and Malaysia.”
India is not part of DEM’s country lineup and the other three combine for less than 20% of the ETF’s weight. DEM is, however, allocated to Russia in a big way. At almost 20%, DEM’s Russia allocation is noticeably larger than what comparable ETFs devote to the “R” in BRIC. [Emerging Markets Dividend ETFs for Lower Risk]
Russia is one of the cheapest emerging markets and does not have a current account deficit, Schwartz noted.
“Russian commodities producers don’t deserve to trade at high multiples and the fact the country usually trades at discounts to other emerging markets is an offshoot of the commodities presence there,” said Schwartz. [ETFs for an Emerging Markets Turnaround]
China is DEM’s second-largest country weight at 17%. At the end of the second quarter, China was the largest dividend payer in dollar terms in the WisdomTree Emerging Markets Equity Income Index, DEM’s underlying index, while Russia was the fastest growing.
Schwartz said some investors have been leery of the dividends from Chinese banks, assuming that growing payouts are an avenue for masking problems with non-performing loans. He did say that Chinese banks are growing profits in such a way that they can keep up with their dividend obligations. Financial services is DEM’s largest sector at 25.8%. Energy is next at 21.2%.
While noting the emerging markets dividend story is still in the early going, Schwartz offered important advice for investors looking to capture income in the developing world.
“Dividends are a way for emerging markets companies to show corporate governance and highlight cash on hand,” he said. “A company’s dividend is an objective measure. It can’t be faked.”
DEM has a distribution yield of 5.95%, according to WisdomTree data. Taiwan, Brazil and South Africa round out the ETF’s top-five country weights.
WisdomTree Emerging Markets Equity Income Fund
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.