DEM - DEM: Emerging Markets With High Yield

Summary

• DEM ETF tracks a dividend-weighted index of emerging market stocks chosen by dividend yield.
• In an environment where markets are fluctuating by 10-20% regularly, ETFs that pay a steady dividend may be useful.
• DEM focuses on emerging markets throughout the world, with two-thirds of its holdings in Taiwan, Hong Kong and Brazil.
• DEM is not an actively managed ETF. It is rebalanced annually based on a specific algorithm.
• We rate WisdomTree Emerging Markets High Dividend Fund (DEM) as a Buy.

By Alex Rosen

Summary

We rate WisdomTree Emerging Markets High Dividend ETF ( DEM ) a Buy. Its diversified, high yield dividend portfolio is particularly attractive in an unpredictable market. It has a predictable, consistent rebalancing mechanism that we like. And, Emerging Markets are potentially "emerging" from a long period of underperformance versus the U.S. stock market.

Strategy

DEM tracks the highest dividend-yielding Emerging Markets stocks. DEM selects firms based on dividend yield from the WisdomTree Emerging Markets Dividend Index. In addition to a global selection of emerging market high dividend stocks DEM also includes the 100 highest Chinese dividend stocks. This creates a The portfolio is rebalanced annually with weight given to dividend yield.

Proprietary ETF Grades

• Offense/Defense: Defense

• Segment: Non-U.S. Equity

• Sub-Segment: Emerging Markets

• Correlation (vs. S&P 500): High

• Expected Volatility (vs. S&P 500): medium

Holding Analysis

DEM's portfolio is quite large, with 460 stock holdings as of this writing. However, that figure overstates how concentrated the fund is at the top. Just six holdings currently account for more than 20% of assets.

With an annual rebalance, the fund's portfolio holdings should be fairly consistent from year to year. After all, it is pulling in over 400 stocks, and that list doesn't roll over so much each year. That said, the larger holdings tend to stick around year after year. But, as implied by DEM's turnover rate of more than 50%, there are a lot of changes each year among the lower-weighted holdings. Due to increased volatility in the overall stock market this year, DEM's recent annual rebalance, which took place on October 20, produced a hefty amount of turnover.

Currently, two thirds of the holdings are spread across Hong Kong, Taiwan, and Brazil. The sector focuses are tech, finance and mining. DEM rebalances annually in October. As a result, it should be able to weed out much of the 2022 clunkers rather than have to sit holding them for an extended period of time.

Strengths

The focus on high dividend yields can provide a solid hedge against market fluctuations. Additionally, the diversity across emerging markets, helps to shield it from crises in one particular sector or region.

Weaknesses

DEM is rebalanced annually based purely on analytics. The strategy is fairly simple. Take the universe of emerging markets, find the top 30% with regard to dividend yield and add it to the fund. This strategy is good in a stable market, but the DEM we see now looks pretty different from the DEM we saw before the rebalance.

The dividend yield appears high at over 10%. But note that this is overstated, due to quirky, and shall we say lazy, way that Wall Street tends to gather statistics about foreign ETF dividends, and simply crank out a number. U.S. stocks typically pay dividends quarterly. Outside of the U.S. this is not the norm. In addition, U.S. dividends tend to be more consistent from quarter to quarter than non-U.S. dividend payments, as international firms will crowd a larger portion of their annual dividend into one payment, with other payments being a lot smaller. This difference in payment stream is not often accounted for by ETF data providers. So, be careful when it comes to evaluating the true yield a new buyer of DEM or other non-U.S. equity ETFs would receive.

Opportunities

DEM is a solid vehicle to pursue total return that emphasizes the income portion as much as this one does. Over the past 12 months, DEM has paid out dividends which, at the current price, yield about 8%. Again, this figure is not going to be as consistent and predictable as a U.S. ETF. But anything close to 8% yield for a fund of this nature will likely be a huge premium over a comparable U.S. equity ETF. In addition, DEM has underperformed U.S. dividend ETFs by a margin so wide, it suggests a reversal in relative performance in the years ahead.

Threats

There is no guarantee that the sustained underperformance of Emerging Market stocks won't remain in place for many more years. Reversion to the mean is not an investor's birthright. Also, with the 100 highest-yielding Chinese stocks embedded in DEM at all times, the risks of that nation's stock market are ever-present here.

Proprietary Technical Ratings

• Short-Term Rating (next 3 months): Buy

• Long-Term Rating (next 12 months): Hold

Conclusions

ETF Quality Opinion

DEM's model of focusing on dividend yield, and the simple, annual re-construction of the portfolio appeals to us. This ETF holds way too many stocks for our liking, but the somewhat top-heavy nature of the holdings neutralizes our concern there.

ETF Investment Opinion

We value DEM as a strong addition to a broader portfolio, especially for those looking for regular income, and/or to diversify geographically. While the global stock market is still in flux, an ETF that emphasizes return of capital through dividends rather than only growth has potential to weather the ebbs and flows of the stock market. DEM's holding strategy limits downside risk and removes any ambiguity about its direction. We rate DEM a Buy.

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