When factoring in single-country and fixed-income offerings, there are over 200 emerging markets exchange-traded products trading in the U.S. That represents a significant portion of the overall U.S. exchange-traded products market.
Diversified emerging markets exchange-traded funds (ETFs), or ETFs exposed to a sizable group of developing economies, are usually the stopping point for many investors looking for emerging markets exposure. Popular alternatives in this ETF genre include the Vanguard FTSE Emerging Markets ETF (NYSEARCA:VWO) and the iShares MSCI Emerging Markets ETF (NYSEARCA:EEM).
Seasoned investors know that some developing economies are credible dividend destinations and that the theme of emerging markets dividends is easily accessible via ETFs. Additionally, experienced investors know that dividend strategies can be used as complements or even alternatives to traditional emerging markets ETFs.
Enter the WisdomTree Emerging Markets High Dividend Fund (NYSEARCA:DEM) as one of the best emerging markets ETFs on the market. In fact, in the right market environments, a case can be made that DEM is the best emerging markets ETF, dividends or otherwise.
While these are superficial metrics, many investors embrace ETFs that they perceive to be large and old. DEM accommodates on those fronts as an assets under management tally of nearly $1.6 billion makes it the largest emerging-markets dividend ETF and the fund is just a few months shy of its tenth birthday.
Over the past year, DEM is up 39%, a showing that easily tops the 29% returned by the MSCI Emerging Markets Index over that span. Of course, yield is a big reason why some might argue in favor of DEM as the best emerging markets ETF. DEM’s underlying index, the WisdomTree Emerging Markets High Dividend Index, has a dividend yield of 5.4%, making the trailing 12-month yield on the MSCI Emerging Markets Index seem piddly by comparison.
DEM’s index “is a fundamentally weighted index that measures the performance of the highest dividend yielding stocks selected from the WisdomTree Emerging Markets Dividend Index,” according to WisdomTree. The more than 300 stocks found in this emerging markets ETF are then weighted by dividends paid rather than by market value, the methodology used by many old guard emerging markets funds.
A significant driver of DEM’s yield and recent outperformance of rival emerging markets funds is Russia. DEM has one of the largest Russia allocations of any emerging markets ETF at 17.4%. That compares to 4.2% in the MSCI Emerging Markets Index. As was noted earlier, DEM can be a best emerging markets ETF in the right environment and usually that environment is one where Russian equities are flourishing as they are now.
“Russian companies pay some of the highest dividends in the emerging market world; Russian stocks are expected to pay a 4.9% dividend yield in 2017 on thier 2016 earnings, 2-4 percentage points more than their peers — and the companies that do pay well are amongst Russian portfolio investors’ favourites,” according to IntelliNews.
DEM’s Russia exposure, not surprisingly, can be a double-edged sword. Over the past three years, a period that saw Russian stocks struggle for a good part of that time, DEM lagged major emerging markets benchmarks while being slightly more volatile.
Still, DEM asserts its status as a best emerging markets ETF when looking at the total picture. Since coming to market in July 2007, is up 12.1%. That doesn’t sound like much, but it is better than the negative returns generated by the largest, diversified emerging markets ETFs. Additionally, DEM has been 670 basis points less volatile than the MSCI Emerging Markets Index since inception. Those data points indicate that DEM’s 0.63% annual fee, high by ETF standards, is actually worth it.
Additionally, Taiwan has one of the most favorable dividend policies in the developing world and is one of the least volatile emerging markets. That country is DEM’s largest geographic weight at more than 25%.
As of this writing, Todd Shriber owned shares of DEM in a retirement account.