When looking to combat rising inflation in the U.S., investors typically turn to domestic assets, but when properly structured, emerging markets can offer market participants some buffer against soaring consumer prices.
The WisdomTree Emerging Markets High Dividend Fund (NYSEArca: DEM) is an example of an exchange traded fund that, in this case, checks the properly structured box. Coming off a 2021 in which it handily outperformed the MSCI Emerging Markets Index, DEM could repeat that feat this year, as its inflation-fighting properties are arguably superior to those of the emerging markets benchmark.
“DEM is over-weight in the most inflation-sensitive sectors—Financials, Real Estate, Materials and Energy—making it a prime candidate, we believe, for investors in search of inflation hedges,” says WisdomTree analyst Matt Wagner. “Unlike the 2000s, the current sector weights of the broad MSCI EM Index skew more toward technology and tech-enabled companies, making it less of a beneficiary of a potential commodity supercycle.”
By way of being heavily allocated to those sectors, DEM is, not surprisingly, a value play. While value isn’t 100% immune to the calamity sweeping financial markets to start 2022, it’s the preferred option to growth, as growth’s recent performances suggest. DEM confirms as much, as it’s beating the growthier MSCI Emerging Markets Index by 360 basis points since the start of 2022.
“Conversely, value stocks that have higher current cash flows and pay out higher dividends are more positively impacted,” adds Wagner. “Out of all of WisdomTree’s ETFs, no product screens higher on value and income than DEM with its dividend yield more than 7% and a 6x price-to-earnings multiple.”
DEM, which tracks the WisdomTree’s Emerging Markets High Dividend Index (WTEMHY), has other advantages. For example, the ETF is significantly underweight to China relative to traditional emerging markets benchmarks, and it features no exposure to the Chinese growth stocks that are vulnerable to regulatory headwinds because those companies aren’t dividend-payers.
Avoiding Chinese growth fare is likely one reason why DEM significantly outpaced traditional rivals in 2021, but that doesn’t mean that the fund lacks exposure to tech-heavy markets. For example, Taiwan accounts for nearly 20% of the ETF’s weight.
“On an aggregate country basis, DEM is under-weight in China by 9%, with a more modest 25% weight as of December 31, 2021,” concludes Wagner. “With just a 15% holdings overlap to MSCI EM, DEM can be a useful complementary EM allocation to dial back exposure to China-tech headline risk or used in isolation to navigate the themes we’ve highlighted for this year.”
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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.