The Right ETF for Big EM Dividends | ETF Trends

Experienced dividend investors know that a plethora of ex-U.S. regions offer bigger yields than are found on broad-based domestic equity benchmarks.

Emerging markets are part of that conversation. However, investors need to be selective when it comes to the related exchange traded funds because, prior to its war against Ukraine, Russia was one of the largest emerging markets dividend payers.

Fortunately, the WisdomTree Emerging Markets High Dividend Fund (NYSEArca: DEM) eliminated its Russian holdings. DEM, which tracks the WisdomTree’s Emerging Markets High Dividend Index (WTEMHY), is a relevant consideration not only because payouts can reduce some of the volatility associated with emerging markets equities, but also because some investors aren’t aware of the dividend proposition in these economies.

“Of the $1.4 trillion in the global Dividend Stream, $216 billion, or 15%, comes from companies within emerging markets. That amount is just over 3.5% greater than the 11.5% weight that emerging markets have in the market cap-weighted MSCI ACWI IMI Index,” notes WisdomTree analyst Matt Wagner.

As is the case with domestic equity funds, sector exposures matter when it comes to emerging markets dividend strategies. DEM is an ideal way to capitalize on that.

“In the emerging markets, the largest dividend sectors are Financials (26%), Materials (16%), Information Technology (17%) and Energy (10%),” adds Wagner.

DEM allocates nearly half its weight to the financial services and materials sectors, while energy is the fund’s third-largest sector exposure at 12.43%. Technology places fourth at almost 11%. Translation: DEM positions investors for the most credible sector-level dividend growth opportunities in developing economies.

At the country level, Russia’s departure refreshes DEM’s portfolio, potentially positioning investors to capitalize on soaring commodities with a larger weight to Brazil.

“Brazil is the most noticeable overweight given its large dividend-paying Energy and Materials companies. Russia was recently removed from MSCI indexes for its invasion of Ukraine but historically had been another overweight based on its large dividend payouts,” says Wagner.

Brazil, Latin America’s largest economy, is DEM’s second-largest geographic weight behind China at 21.12%. Taiwan, one of the least volatile emerging markets, is the ETF’s third-largest country weight at 19.81%. That’s an important trait because Taiwan is a tech-heavy, high-quality market with strong dividend growth potential. Bottom line: DEM has some compelling attributes for investors seeking ex-U.S. dividend exposure.

“For investors looking to increase dividend income, emerging markets equities may offer a compelling addition to portfolios in a low-yield environment,” concludes Wagner.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.