Whether it is on the demand side in China, India, South Korea, or on the production side, in Brazil, Russia and more, emerging markets exchange traded funds have some exposure to oil prices. While the MSCI Emerging Markets Index allocates just 7.29 percent of its weight to the energy sector, oil prices play a part in the benchmark's performance.
For example, the MSCI Emerging Markets Index allocates almost 45 percent of its combined weight to China and South Korea, both of which are net oil importers. The index devotes 10.59 percent of its geographic exposure to Brazil and Russia, which are major crude producers.
Some emerging markets ETFs, including the WisdomTree Emerging Markets High Dividend Fund (NYSE: DEM), are better-suited for taking advantage of rising oil prices.
The $2.25-billion DEM tracks the yield-weighted WisdomTree Emerging Markets High Dividend Index.
“The index weights companies that rank in the highest 30 percent by dividend yield using annual cash dividends paid. Since its inception more than 10 years ago, the WT EM High Dividend Index has outperformed its benchmark, the MSCI Emerging Markets Index, by 151 basis points annually — raising the question about whether an investor really needs an active manager to outperform in this 'inefficient' asset class.”
Why It's Important
Against the backdrop of rising oil prices, DEM could offer investors outperformance potential due in large part to the fund's overweight position in Russsian stocks. DEM allocates 13.65 percent of its weight to Russia, well above the 3.32 percent in the MSCI Emerging Markets Index. Russia is the world's largest oil producer.
Overall, DEM devotes 18.6 percent of its weight to energy stocks, making that the fund's second-largest sector exposure. Energy is merely the fifth-largest sector weight in the MSCI Emerging Markets Index.
“If we look at how both the WT EM High Dividend Index and the MSCI EM Index fared during periods of rising and falling oil prices, we see very robust returns for emerging markets generally during rising oil prices and very subdued or negative returns during falling oil price environments,” WisdomTree said.
In recent years, the sensitivity of emerging markets stocks to commodities prices has decreased, but for investors looking for a broad-based play with some sensitivity to higher crude prices with an income kicker, DEM is a practical option.
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Todd Shriber owns shares of DEM.
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