Emerging markets equities and exchange traded funds have been vexing propositions for investors for over a year. With little upside to be had from many of the big name, diversified developing markets ETFs, compensation for investors’ trouble has come in the form of increased dividends.
Last year, emerging markets companies accounted for $1 of every $7 paid in dividends and payouts in developing economies have more than doubled over the past years, according to Henderson Global Investors. [Emerging Markets Dividend Growth]
Those dividends make a difference, not only in terms of total returns, but also when it comes to muting the impact of volatility on an already volatile group of stocks. For example, the WisdomTree Emerging Markets Dividend Index (“WTEMI”) is built differently—and it performs differently as well. WTEMI has not only outperformed the MSCI EM since its inception in 2007, but it has done so with less risk,” according to WisdomTree research.
WTEMI is the underlying index for the WisdomTree Emerging Markets Equity Income Fund (DEM) , one of the gold standards among emerging markets dividend ETFs. The $3.7 billion ETF features a 30-day SEC yield of nearly 4%.
Proving that emerging markets dividends do make a difference, DEM has outperformed the Vanguard FTSE Emerging Markets ETF (VWO) and the iShares MSCI Emerging Markets ETF (NYSEArca: EEM) by an average of 800 basis points over the past three years. [Not the Best Time to Sell Emerging Markets ETFs]
DEM also delivers in terms of toned down volatility.
“In fact, relative to the MSCI EM, WTEMI has experienced lower volatility as measured by both its since-inception beta and standard deviation. Since inception, WTEMI’s standard deviation has been 237 bps lower than the MSCI EM’s, with a beta of 0.90,” according to WisdomTree.
DEM is less volatile than some of its counterparts despite one of the largest weights to Russia among diversified emerging markets ETFs. The ETF features an 18.8% weight to Russia, one of the largest allocations to the country among multi-country emerging markets ETFs. However, that is by virtue of Russia being one of the largest dividend payers in the developing world. [Questioning Russia's Market Status]
Four Russian stocks, including two oil and gas names, are found among DEM’s top-10 holdings. China and Taiwan, two emerging markets dividend stars, combine for nearly 31% of DEM’s weight. Last year, China was the largest dividend payer in DEM’s underlying index while Russia was the fastest grower of payouts.
WisdomTree weighs DEM’s constituent companies by dividends and earnings rather than by market value while adjusting for relative value in an effort to avoid overweighting expensive sectors and countries according to the issuer.
DEM also features a combined 29% weight to telecom, utilities and technology names, three sectors that in the developing world have outperformed important emerging markets benchmarks over the past three years. [Emerging Markets Value Bets]
WisdomTree Emerging Markets Equity Income Fund
Tom Lydon’s clients own shares of DEM and EEM.
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