Not all emerging market exchange traded funds (ETFs) are alike. Several can look at the same region, yet deliver some different results. Last week, we covered two of them that are based on market-cap weightings. But it’s fundamentally weighted funds that are outperforming.
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%.