“With DEM’s large allocations in Russian stocks and Chinese banks following its 2012 rebalance, I was concerned that volatility was going to rise, which turned out to be the case,” the analyst writes.
The increasing stake in Russia is due to a ruling announced last year that state-owned firms are to pay at least 25% of net income in dividends, Oey notes.
Russia is lagging in emerging markets this year. Market Vectors Russia ETF (NYSEArca: RSX) is down 13.4% so far in 2013, while EEM is off 10.2%.
Morningstar gives five stars to DEM, its top rating. However, the investment researcher is concerned about the rising exposure to Russia and to the big four state-owned banks in China. The Chinese banks accounted for 13% of the portfolio following the 2012 rebalance and will account for about 10% after this year’s rebalance.
“Not surprisingly, we continue to be concerned about the exposures of this fund and the impact that may have on performance,” Oey said.
WisdomTree Emerging Markets Equity Income
Full disclosure: Tom Lydon’s clients own EEM.