Emerging markets exposure has become a staple in countless portfolios as the evolution of the ETF universe has made it easy and cost-effective for investors to abandon their home country bias. Whether its broad-based or country-specific exposure that you desire, there’s more than likely several ETFs that can suit your needs. For long-term, buy-and-hold investors portfolio diversity and expenses are two critical factors to consider when shopping around, although the towering lineup of over 65 Emerging Markets Equities ETFs certainly doesn’t help simplify this chore [see Free 7 Simple & Cheap All-ETF Model Portfolios].
As such, we take a closer look under the hood of an intriguing offering from WisdomTree that has managed to post truly impressive results relative to its peers. The WisdomTree Emerging Markets Equity Income Fund (DEM) warrants a closer look from anyone looking to tap into overseas markets while simultaneously beefing up their current income stream [see Monthly Dividend ETFdb Portfolio].
Since launching in July of 2007, DEM has managed to accumulate $4.5 billion in assets under management, making it the third most popular emerging markets product behind iShares’s EEM ($37.5 billion AUM) and Vanguard’s VWO ($57.8 billion AUM). This WisdomTree fund is linked to a fundamentally weighted index that offers exposure to high dividend yielding stocks selected from a basket of emerging markets. By comparison, both EEM and VWO are linked to the well-known market capitalization weighted MSCI Emerging Markets Index [see also 5 Commodity Dividend Stocks To Stay Away From].
At first glance, DEM pales in comparison to the more popular VWO; this WisdomTree ETF charges a steep 0.63% expense fee relative to its competitor from Vanguard which boasts a cheap 0.20% price tag. While both ETFs offer broad-based exposure to the world of emerging markets, a closer look at historical performance reveals some noteworthy differences between these two offerings [returns as of October 8, 2012]:
|Ticker||ETF||3-Year Return||5-Year Return||Year-To-Date|
|DEM||Emerging Markets Equity Income Fund||24.84%%||20.38%||7.89%|
|VWO||Emerging Markets ETF||14.72%%||-13.27%||10.96%|
VWO has managed to pull ahead of DEM thus far in 2012, however, from a longer-term perspective it’s quite clear the WisdomTree ETF has posted far more impressive results. What’s the reason behind this rather significant difference in performance results between two seemingly similar ETFs? A closer look under the hood offers valuable insights [see also 5 Emerging Markets ETFs ex-Taiwan & South Korea].
Under The Hood
As mentioned previously, VWO tracks a market cap-weighted index, and as such, it offers exposure to the biggest companies from the developing world. While VWO’s traditional, passive approach boasts numerous benefits over more costly and complex strategies, the methodology employed by DEM may be more compelling when accessing the emerging markets asset class [see Emerging Markets ETFs: 7 Factors Every Investor Should Consider].
First and foremost, DEM separates itself from the pack by exclusively focusing on high yielding, dividend-paying securities; this allows investors to beef up their current come and essentially reduce their portfolio’s overall volatility. This ETF holds approximately 235 securities and allocates about one-third of its total assets to the top ten holdings alone, giving DEM a somewhat top-heavy portfolio composition profile [see DEM Holdings].
DEM is tilted towards giant and large cap stocks, although mid and small cap securities also receive adequate exposure in this portfolio. From a sector breakdown perspective, financial services take the top spot followed closely by energy holdings. DEM also rounds out exposure fairly equally across the communication services and basic materials sectors, while technology, consumer cyclical and utilities stocks receive the smallest allocations. Top holdings by country include: Taiwan, China, Brazil, Russia and South Africa.
Investors looking to diversify their portfolio’s equity component ought to consider DEM as it offers exposure to a well-balanced basket of emerging markets stocks along with a track record that easily surpasses the competition from a performance perspective. To top it off, this ETF also boasts an attractive dividend distribution that is sure to appease income-hungry investors in this low-rate environment; DEM recently featured a 30-day SEC yield of 4.01%.
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Disclosure: No positions at time of writing.