Pay For Play With An Emerging Markets ETF

With time running out in 2015, it is not a stretch to say this year will be another disappointing one for emerging markets equities and the exchange-traded funds that hold those stocks. However, in what boils down to confounding price action for income investors, emerging markets dividend funds have lagged their non-dividend counterparts.

For example, the WisdomTree Emerging Markets Eqty Incm Fd DEM is down 17.7 percent year-to-date, trailing the MSCI Emerging Markets Index by 670 basis points. Assuming the Fed does proceed with raising interest rates, emerging markets investors should focus on quality over value.

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Quality, Value And Emerging Markets Dividend ETFs

As a new research note from WisdomTree pointed out, the MSCI Emerging Markets Quality Index outperformed its value counterpart and the MSCI Emerging Markets Index during each of the last three Fed tightening cycles.

That could speak to DEM being a potential rebound candidate in 2016. On that note, DEM currently yields 5.1 percent on a trailing 12-month basis – about 270 basis points more than the dividend yield on the MSCI Emerging Markets Index.

That is relevant because when emerging markets stocks spend a year in high-yield territory, they tend to outperform the following year.

“WisdomTree's ETFs are constructed focused on the cash dividends paid out by its constituents. As such, when a non-constituent raises its dividend on an annual basis higher than others in the index, the stock may be added to the index. An example of security added as part of the late October 2015 rebalance was Chunghwa Telecom.

“The Taiwan-based telecom provider approximately doubled its dividend in July 2015 and during the October 2015 index review the stock became eligible for inclusion. Chunghwa Telecom is now a top-10 holding in WisdomTree Emerging Markets High Dividend Fund (DEM), which has $1.5 billion in assets,” said S&P Capital IQ in a new research note.

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Looking Closer At DEM

As the research firm pointed out, an important element to consider with DEM are the ETF's country weights. Those weights explain some of the performance difference between the ETF and the MSCI Emerging Markets Index.

DEM has more than triple the exposure to Russian stocks than is found in the MSCI Emerging Markets Index, a good thing in a year when Russia is the best-performing BRIC market. However, DEM has been hampered by a combined overweight to Brazil and South Africa, two markets that have struggled due to sagging currencies and slumping commodities demand.

Following its recent rebalance, DEM's weight to Taiwanese stocks jumped to 22.7 percent. That could be a positive considering Taiwan has a favorable dividend policy and is one of the least volatile emerging markets. Chinese and Russian stocks combine for 29.5 percent of DEM's weight.

DEM's “exposure to Taiwan increased by 910 basis points at the end of October, relative to the allocation in September prior to the annual index review. During the 12-month period, dividend growth by Taiwanese companies rose 17 percent, even adjusted for currency weakness, much higher than most countries. Meanwhile, dividends decreased in Russia, particularly at energy companies and the current weighting fell by 660 basis points exacerbated by a sharp decline in its currency,” added S&P Capital IQ.