While the Federal Reserve looks to keep inflation in check with interest rate hikes, it’s keeping fixed income investors on their toes. In order to extract more income, it will take a higher tolerance for risk, offering opportunities in emerging markets (EM).
Using the MSCI Emerging Markets Index as a gauge, EM was certainly off to a roaring start, jumping up to 10% in the final week of January. Since then, inflation fears have started to creep back into investor sentiment, and the index has come down since with a year-to-date gain of just above 2%.
“A turbulent end of the easy-money era has deflated expectations for a boom year for battered emerging market assets,” a Bloomberg article noted.
Still, that doesn’t mean investors should shy away from EM assets at a time when inflation is high and the strength and safety of the dollar are prevailing over other riskier assets. There are many opportunities in EM if investors know where to look and if economic conditions improve as 2023 continues.
“Brought down to earth by a volatile first quarter, the much-hyped EM investment story for 2023 is turning into one of resilience and hopes for decent returns — that is if fundamentals, not contagion risk, drive flows,” the article added.
High Yielding Options From EM
Fixed income investors looking to extract maximum yield and still get the diversification that EM assets offer can look to the WisdomTree Emerging Markets High Dividend Fund (DEM) and the WisdomTree Emerging Markets SmallCap Dividend Fund (DGS). In terms of their 30-day SEC yields, DEM offers about 8% and DGS offers 5%, as of April 21.
Per its fund description, DEM seeks to track the investment results of high dividend-yielding companies in the emerging markets region. EM also offers opportunities for investors looking for growth-fueled plays as well as income, which DEM has.
As for DGS, it seeks to track the investment results of dividend-paying small-cap companies in the emerging markets region. That same growth potential is also found in this fund with its focus on small-cap companies.
Top country allocations in DEM include Taiwan, China, and Brazil (comprising about 70% of the fund). DGS offers exposure to primarily Taiwan, China, and South Korea (close to 60% of the fund).
The diversification also extends to the number of holdings in both funds. DEM has over 450, while DGS boasts over 900 holdings, preventing over-concentration in certain stocks.
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