Potential investors should be aware that the ETF does not hedge against currency risks, so a depreciating U.S. dollar would potentially augment returns but a weakening emerging market currency can negatively affect the ETF.
DEM’s exposure to Russia increased from a low-single-digit percentage over the last few years to 13% since the last rebalance, which is a significant overweighting compared to the MSCI Emerging Markets Index of 6%.
“While Russia is currently trading at cheap valuations (the MSCI Russia Index is trading at about 5 times trailing 12-month earnings versus a five-year average of 7 times), investing in Russia is a very risky proposition – the country’s stock market has very heavy exposure to the energy sector, the ruble is extremely volatile, and corruption within Russia is rampant,” Oey cautioned.
DEM’s weighting toward China has increased to 16% from 4% over the last two years, with a heavy concentration in Chinese banks.
“They are still exposed to the potential of souring loan portfolios and may need to trim dividends to strengthen their balance sheets, which would negatively affect share prices,” Oey said. “The government also plans to liberalize interest rates in an effort to stimulate competition. Such moves could threaten these banks’ highly profitable oligopoly.”
WisdomTree Emerging Markets Equity Income
For more information on the emerging markets, visit our emerging markets category.
Max Chen contributed to this article.
Full disclosure: Tom Lydon’s clients own DEM and EEM.