Under The Hood: An Oldie, But Goodie (DGS, THD, VWO)

Since its debut in October 2007, the WisdomTree Emerging Markets SmallCap Dividend Fund DGS has been a pioneer. The fund was the first to combine the allure of dividends, emerging markets and small-caps under one umbrella. Gaining exposure to emerging markets dividend payers via ETFs isn't hard. Nor is finding a plethora of emerging markets small-cap options. It's the dividend and small-cap combination that sets DGS apart, but only recently has the fund's incognito status started to change, though it should be noted we were bullish on DGS in the low $40s in December 2011 when the dividend yield was 6.41%. That yield has since fallen to 3.48%. What isn't falling is investors' interest in DGS. The fund had $720 million in assets under management as of mid-December 2011. That number surpassed $800 million by February 2012 and as of May 2, DGS was a member of the $1 billion AUM club. All of that after a nasty 2011 sell-off that saw DGS treated as the emerging markets/small-cap play that it is while the dividend buffer was basically ignored. In other words, while it's true that dividend stocks often outperform non-dividend payers over time and that small-caps are an excellent way of getting exposure to the domestic growth stories in many emerging markets, neither factor was enough to keep DGS from following other emerging markets ETFs lower last year. Home to 542 stocks, none receiving a weight of more than 1.07%, DGS charges 0.63%. More importantly, the fund shares something in common with many of its large-cap focused brethren: A heavy weight to Taiwan. That country, whose emerging markets status is dubious at best, accounts for almost 26% of DGS' weight. Another 8.25% goes to South Korea, another country that many experts and traders are reluctant to call an emerging market. Israel checks in at 6.5% and that country lost its emerging markets status several years ago. None of that means DGS is a "bad" ETF. It's not. With a yield of almost 3.5% and a year-to-date return of 15.3%, almost 25% better than what the Vanguard MSCI Emerging Markets ETF VWO has offered, it's unlikely DGS will illicit many complaints among its shareholders. DGS is also fairly diverse at the sector level with five groups – financials, industrials, technology, consumer discretionary and materials – landing double-digit allocations. Financials being the largest sector weight is par for the course with scores of emerging markets ETFs and it's probably something investors can expect to change over time as emerging economies mature and other companies besides banks gain large market caps. Speaking of changing and maturing, that's what it might take to shift DGS' country allocations toward more lucrative emerging market opportunities beyond Taiwan and South Korea. DGS' country weights are a fairly accurate representation of the fund's index. At least for now that implies Taiwan is home to a fair amount of small-cap dividend payers. An almost 13% weight to Thailand is a nice kicker particularly at a time when Thai stocks are flourishing. DGS actually has one of the larger Thailand allocations in the ETF universe beyond the iShares MSCI Thailand Investable Market Index Fund THD. What would be more advantageous to investors would be for high potential markets such as Chile, Indonesia, the Philippines and Turkey, just to name a few, to garner larger footprints within DGS and that can only happen if the small-caps in those countries bolster their dividend reputations. For now, take DGS as it is and remember that's not a bad thing at all. For more on emerging markets small-cap ETFs, please click HERE.