WisdomTree’s line of dividend ETFs was one of them. The ETF provider known for using a dividend strategy in many of their ETFs provided impressive yields at the end of the year, ranging anywhere from 4% to 8%.

“The dividend fund yield at the end of 2008 was significantly higher than the yield you could get in U.S. government bonds,” notes Luciano Siracusano, WisdomTree’s chief investment strategist.

For example, their largest international dividend fund, WisdomTree DEFA (DWM), paid out a total of $1.76 per share in December. That distribution was 4.69% of the fund’s net asset value (NAV). “That’s at a time when the U.S. market is yielding 2%,” Siracusano says.

The dividends are connected to WisdomTree’s proprietary methodology, by which they include only dividend-paying stocks in their indexes, then weight them according to the dividend the company paid in the previous year. Only dividend-paying companies are eligible for inclusion in the indexes. The end result is that stocks that pay more divideds have a greater weight.

“Dividends are important for people who want to generate income in a downturn, but it’s also important for long-term investing,” Siracusano notes. “There’s a connection between higher dividends and higher returns over time.”

According to their investment philosophy, from 1926 through 2004, reinvestment dividends accountsed for 96% of the stock market’s total return after inflation.

The bleak economic news that came out in 2008 saw a number of companies scaling back their dividends, if not eliminating them altogether. However, in the big picture, relatively few companies actually cut dividends and just three companies were responsible for the majority of that: Citigroup (C), Bank of America (BAC) and Wachovia (WB).

WisdomTree’s Director of Research Jeremy Schwartz points out that at the time of their annual index reconstruction on Nov. 30, there were 1,200 dividend payers paying out $267 billion. While that’s down from the $288 billion paid out at the same time in 2007, the three financials above were responsible for $20 billion of the $21 billion difference.

Their domestic funds pay quarterly, and the international funds will also begin paying quarterly this year. Until now, they were paying annually.

WisdomTree went with the dividend strategy because, Siracusano says, “We realized the world didn’t need another market-cap weighted index fund. We use this strategy because there’s a lot of research that told us it was better.”

Three funds to take notice of are:

• WisdomTree Total Dividend (DTD): This fund gives exposure to all dividend-paying stocks in the United States. It had a yield of 4.4% at the end of 2008, and distributed 0.39 cents a share in the December quarter.

• WisdomTree DEFA (DWM): Tracks the WisdomTree Dividend Index of Europe, Far East Asia and Australasio (DEFA). As noted above, it distributed $1.76 a share in December for a 4.6% yield.

• WisdomTree Emerging Markets High-Yielding Equity (DEM): Had a yield of 6% at the end of December. Siracusano says that while cap-weighted indexes were down as much as 58%, DEM was down 37% for 2008.

Eastern Europe has been experiencing a bubble all their own, with new private businesses popping up everywhere, and economic and political stability. But the party cannot last forever, and wage costs are creeping up, labor shortages are hurting, infrastructure keeps on aging, which is actually stopping up Poland’s trade, says The Economist.

Growth has still managed to stay steady in this region, however, as domestic demand has been up, and intra-East European trade has made up for fewer exports in the West.

Latvia and Estonia in particular experienced breakneck growth in recent years, but the bubbles have popped. Retail sales and industrial production in Latvia are down, while construction has imploded. Inflation is perched at a whopping 17%. At least the gloomier predictions have so par proved to be unfounded. Latvia hasn’t been forced to devalue.

In Poland, things are starting to recover, as many Poles are returning from Britain, where they had retreated to find work. Growth was up 6.1% for the first quarter, and unemployment has all but disappeared after hitting 20% in 2003. The biggest threat is rising interest rates, which would cause more of an economic slowdown than the previous rate of 4% , currently at 6%.

There is no Slovakia ETF, but access to this region can be had through the Austria ETF.

ETFs covering these regions are:

• iShares MSCI Austria (EWO), down 19.8% year-to-date
• SPDR Emerging Europe Fund (GUR), down 25.5% year-to-date
• Claymore/BNY Mellon Frontier Markets (FRN), down 12.5% since June 13th inception
• WisdomTree Emerging Markets High-Yielding Fund (DEM), down 5.6%

A case in point is the WisdomTree Emerging Markets High-Yielding Equity (DEM), which has so far managed to resist the downturn in energy and commodities by a big margin in the emerging market ETF space. Jeremy Schwartz, deputy director of research at WisdomTree, noted that because the fund did its annual rebalancing in June, the fund has been able to significantly outperform other similar funds in the emerging markets category.

When the rebalancing took place, the weights in energy and materials were reduced, because of the fund’s strategy of selling off stocks that had risen above their fundamentals or become “expensive,” while buying more of the cheap stocks.

In July, the commodities started their downturn.

“It was a little bit of fortuitous timing that oil went down,” he admits. But he points out that the recent events are a prime example of how the fund’s quant rules-based system really works. “You don’t have to decide. It’s a mechanical rules-based formula, based on total dividends paid.”

The fund takes those stocks with the top dividend yields, then winnows that list down to what is currently 310 holdings.

WisdomTree uses dividends to weight stocks because, among other things, cash dividends can be a measure of a company’s value and profitability.

So far, the strategy appears to work: the fund is down 2.6% year-to-date. It was outperforming other emerging markets ETFs before the rebalancing, but the latest moves only enhanced its performance:

• PowerShares FTSE-RAFI Emerging Markets ETF (PXH), down 14.2% year-to-date
• WisdomTree Emerging Markets Small Cap Dividend (DGS), down 15.7% year-to-date
• Vanguard Emerging Market (VWO), down 18.4% year-to-date
• iShares MSCI Emerging Markets (EEM), down 17.8% year-to-date

PowerShares also uses four factors to weight its stocks: dividends, cash-flow, book value and sales, and it to is outperforming the more traditional weighting methods used by VWO and EEM.

Between the fundamentally weighted ETFs, there’s no huge cost advantage, says Confused Capitalist for iStock Analyst. DEM and DGS are cheaper at 0.63%, while PXH is 0.85%.

Gary Gordon of ETF Expert points out that this depends on how one defines diversification. If investors are looking to reduce market risk by meshing assets that do not tend to move in the same direction, their investments must have little relationship, if any at all. Or, if one is looking to invest in a number of stock assets with differing degrees of upside potential and downside volatility, then the issue is not price direction.

Since all stock assets tend to move in the same direction, most investors are not really diversifying by purchasing different companies and different sotck funds.

Over the last few years, there has been increased discussion and investment in foreign markets. This arose from the idea that foreign stocks could move independently of the US stock market. However, as the current market environment reveals, the U.S. market has affected nearly every other stock market worldwide. These market trends reveal that emerging markets have a higher correlation to U.S. indices, such as the S&P 500, than originally thought.

As the economy is still experiencing a bear market, it is essential to make sure that one’s portfolio is truly diversified. To ensure solid diversification, Gordon recommends that a portfolio has assets with less than a 0.5 correlation to the S&P 500. Even better, he encourages investors to consider assets with a zero correlation. Finally, he recommends some negatively correlated assets, or those that move in the opposite direction of the S&P 500.

Among the suggestions include:

• Dow Jones Total Commodity Index (DJP), up 11.3% year-to-date
• Wisdom Tree Emerging Market High Yield Fund (DEM), down 0.1% year-to-date