WisdomTree Emerging Markets Equity Income (NYSEArca: DEM) is much smaller than its two main rivals in the diversified emerging market ETF category but the fund’s dividend-weighted approach has helped it handily outperform the competition.

The WisdomTree ETF has about $5.3 billion in assets under management, compared with $61.6 billion for Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) and $52.1 billion for iShares MSCI Emerging Markets (NYSEArca: EEM). The Vanguard ETF is switching to a new tracking index. [Vanguard Emerging Market ETF Kicks Off Index Transition]

DEM has a five-year annualized return of 7.7% versus 2.2% for EEM and 1.9% for VWO, according to investment researcher Morningstar. DEM has also been less volatile than its larger rivals.

The outperforming WisdomTree fund tracks an in-house index designed by the ETF provider. The benchmark is a so-called fundamentally weighted index that targets emerging market stocks with high dividend yields. Also, companies are weighted based on annual cash dividends paid to shareholders. DEM tends to have a tilt to value stocks.

Meanwhile, EEM and VWO weight stocks based on their size, or market capitalization.

DEM, the WisdomTree ETF, rebalances annually, which forces the fund to buy low and sell high, analysts say.

The fund has an SEC 30-day yield of 3.94%, according to WisdomTree.

DEM “has long been our favorite exchange-traded fund for emerging-markets equity exposure, thanks to its significantly lower volatility relative to the MSCI Emerging Markets Index and stellar trailing five-year risk-adjusted returns,” Morningstar analyst Patricia Oey wrote in a recent commentary.

However, she expressed concern the ETF may be getting riskier following the recent annual rebalance. [Emerging Market ETFs See Inflows as Volatility Lowest Since 2003]

“For example, Taiwanese and Brazilian companies tend to be higher dividend payers due to tax rules and laws that support dividend payouts,” Oey said. “As a result, emerging-markets dividend funds, including DEM, tend to have substantial exposure to these countries.”

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