Looking For Value In The Right Places

Conventional wisdom, at least as it pertains to equity market valuations, holds that U.S. equities are pricey, while ex-U.S. markets such as Europe and Japan are attractively valued. Emerging markets are also viewed as bargains relative to the U.S.

Some emerging markets exchange traded funds may present investors with more compelling value than others. The WisdomTree Emerging Markets High Dividend Fund DEM could be one such ETF. DEM follows the WisdomTree Emerging Markets High Dividend Index, which selects high-yield emerging markets stocks and then weights those securities based on cash dividends paid.

DEM's underlying index “shows a dividend yield of 5 percent, a trailing 12-month P/E ratio around 10x and an estimated P/E ratio in the single digits. When we look at valuations across the world, there are no indexes WisdomTree has with lower valuation multiples,” WisdomTree said in a recent note. 

Favorable Comparisons

DEM's index yield of 5 percent is more than triple the comparable metric on the MSCI Emerging Markets Index. Plus, the aforementioned valuation metrics indicate the WisdomTree Emerging Markets High Dividend Index is trading at a discount relative to the widely followed emerging markets benchmark.

“The industry groups with the lowest multiples today are banks, energy companies and materials, which are more cyclical and tied to global growth prospects,” said WisdomTree. “Country-wise, there are large allocations to Taiwan and China, followed by Russia and South Africa.”

Taiwan and China combine for over 43 percent of DEM's weight. The $2 billion ETF allocates 13.5 percent of its weight to Russian stocks, more than quadruple the Russian exposure found in the MSCI Emerging Markets Index. DEM's overweight position in Russia makes sense because the fund is a dividend strategy, and Moscow takes a heavy-handed approach to ensuring its state-run companies pay dividends.

Impressive Track Record

Year-to-date, DEM is trailing the MSCI Emerging Markets due in part to Russian stocks lagging and a lack of Chinese stocks, many of which are not dividend payers. DEM, though, has an enviable long-term track record.

“Going back 10-plus years, the WisdomTree Emerging Markets High Dividend Index has outperformed the MSCI Emerging Markets Index by 137 basis points (bps) per year, and most of this benefit came from stock selection — even more so than the allocation percentages,” according to WisdomTree.

DEM has decent technology exposure at just over 13 percent, but financial services and energy names combine for 38 percent of the fund's weight.

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Todd Shriber owns shares of DEM.