Small Caps, EM Dividends Work Again for This ETF

There is no refuting that emerging markets dividends are on the rise and are playing an increasingly important role in compensating investors as they wait for moribund developing world equities to rebound.

The proof is in the pudding on multiple fronts. Last year, emerging markets companies accounted for $1 of every $7 paid in dividends and payouts in developing economies have more than doubled over the past years, according to Henderson Global Investors. [Emerging Markets Dividends on the Rise]

Not only that, but as is the case in developed markets, emerging markets dividends can help damp volatility. Just consider the case of the WisdomTree Emerging Markets Equity Income Fund (NYSEArca: DEM).

“Relative to the MSCI EM, WTEMI (DEM’s underlying index) has experienced lower volatility as measured by both its since-inception beta and standard deviation. Since inception, WTEMI’s standard deviation has been 237 bps lower than the MSCI EM’s, with a beta of 0.90,” according to WisdomTree research.

Indeed, DEM was less volatile than rival diversified emerging markets ETFs last year. Dividends can also reduce volatility and enhance returns with emerging markets small-caps, as highlighted by the WisdomTree Emerging Markets SmallCap Dividend Fund (NYSEArca: DGS). [Emerging Markets Dividends Matter]

Last year, DGS outperformed DEM, the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) and the iShares MSCI Emerging Markets ETF (NYSEArca: EEM) while being less volatile than all three. This year, DGS is the only member of that quartet to trade higher, buoyed in part by exposure to resurgent Southeast Asian markets. Malaysia, Thailand, Indonesia and the Philippines account for nearly a quarter of the ETF’s weight. [Upside for Indonesia ETFs]

“We believe that small-cap stocks offer a different risk profile and return potential that at times can be complementary to large-cap securities. Some of the long-term research on equity markets suggests that small-cap value is one of the best-performing segments across long periods, and we think this strategy is very well represented in the emerging markets with a focus on small-cap dividend payers,” according to WisdomTree.