WisdomTree isn’t wasting any time this summer, launching a series of new products onto the market. The firm just put out a dividend growth fund targeting the U.S. small cap market (DGRS), and it appears to be taking a similar approach to emerging markets now as well.
The company just announced the release of the WisdomTree Emerging Markets Dividend Growth ETF (DGRE), giving investors an option for dividend stocks with growth characteristics in the emerging world. The new ETF will follow the Emerging Markets Dividend Growth Index, charging investors 63 basis points a year in fees and holding roughly 160 stocks in its basket.
DGRE in Focus
In order to be included in the index, companies must have a dividend coverage ratio greater than 1.0. This is done because WisdomTree believes that if a company doesn’t have that level of coverage, it will not be a dividend growth leader in the future (see Top 3 Emerging Market Dividend ETFs for income and Growth).
Beyond that factor, the top 50% of companies with the best combined rank of growth and quality are then included. These top companies are picked based on long term earnings growth expectations (growth) and three year average ROA as well as the three year average ROE (quality).
Additionally, investors should note that the index is ‘dividend stream weighted’, taking dividends per share times shares outstanding in order to get individual company weights. This gives the biggest allocations to firms that pay out the most in dividends, breaking the link between market cap and weight.
This produces an ETF that is somewhat heavy in traditional dividend sectors like consumer staples and telecommunications, as these two each account for more than 19% of the fund. This is closely followed by materials and financials (both have more than 13% of the assets), though it is light in utilities and health care.
In terms of country exposure, Brazil and South Africa both account for just over 14% of the fund, followed by Indonesia, Russia, Mexico, and Thailand which all have at least 10% as well. A few other emerging economies round out the list—like China, Taiwan, and Turkey—but in total just 14 nations are represented (see 3 Emerging Market ETFs Still Going Strong).
"While many dividend-focused indexes in emerging markets focus on yield and valuation, there is a dearth of options that focus on dividend growth,” said Jeremy Schwartz, WisdomTree Director of Research in a press release. “We believe that DGRE offers the investment flexibility to respond to dividend growth potential rather than historical dividend behavior, aligning nicely with dividend behavior of emerging market companies.
How does it fit in a portfolio?
This ETF may be appropriate for those seeking a nice blend between dividends and growth instead of a focus on one of these two items. It could also be an interesting choice for investors who seek a slightly different approach to emerging market investing, and in particular one that doesn’t allocate so much to energy and financials.
On the other hand, the fund may not be a solid choice for those looking for exposure to ‘traditional’ emerging markets, as some smaller—potentially riskier—nations make up big allocations in the ETF. Also, for investors seeking high yields, this may not be the best choice as the growth component could dull the overall payouts of DGRE (read 11 Great Dividend ETFs).
In terms of competitors, there are relatively few for the emerging market dividend growth world. There are several emerging market dividend funds—such as EDIV or DVYE—while there are a couple growth products such as EGRW. However, the biggest competitor will probably be the relatively new EGShares Emerging Markets Dividend Growth ETF (EMDG).
This fund, which debuted at the beginning of July, has a somewhat similar focus as the new WisdomTree ETF, though it is a bit more expensive at 85 basis points a year in fees. Additionally, EMDG’s index doesn’t hold any assets in Taiwan, a contrast from the WisdomTree product which gives a moderate allocation to that nation (see EGShares Launches Emerging Market Dividend Growth ETF).
Investors should also note that EMDG focuses solely on dividend growth for its exposure, seeking roughly 50 companies whose 5-year dividend payout growth is faster than the average for the broader FTSE All Cap Emerging ex-Taiwan Universe. This gives the index a solid 3.9% yield, and could make this more of an income destination than DGRE.
There is a bit more competition in the emerging market dividend growth sphere, as WisdomTree is offering up new competition in the space, and continuing its recent product launch frenzy. The only fund in the space right now though has seen minimal interest in its first month, so there may be some difficulty in building up assets.
However, EMDG is quite different than WisdomTree’s DGRE which is more of a blend between dividends and growth than anything else so it is possible that the new product can attract some assets. Still, it will be interesting to see if investors embrace this approach for exposure instead in the often overlooked, but potentially intriguing, emerging market dividend growth ETF market.
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