DEM - DEM: This Decent-Yielding Fund Has Opted For The Right Emerging Markets

2023-08-07 17:49:08 ET

Summary

• WisdomTree Emerging Markets High Dividend Fund ETF is an exchange-traded fund that invests in high-dividend-paying stocks from emerging markets like Brazil, India, China, and Taiwan.
• The DEM ETF is overweight in Taiwan and China, with significant allocations in Brazil and India.
• The fund has a high expense ratio and turnover ratio, and its price return has been disappointing, but it offers quarterly payouts with a decent yield.

~ by Snehasish Chaudhuri, MBA ( Finance ).

WisdomTree Emerging Markets High Dividend Fund ETF ( DEM ) is an emerging market exchange-traded fund, or ETF, that was launched on July 13, 2007, by WisdomTree Investments, Inc. The fund is co-managed by WisdomTree Asset Management, Inc. and Mellon Investments Corporation. It invests in high dividend paying stocks of diversified companies from public equity markets of global emerging regions. DEM is one of those ETFs that focuses on economies like Brazil, India, China and Taiwan. All these trade at a compelling valuation. These markets may have greater upside potential due to their long-term underperformance in the past decade. However, its higher exposure to China and Taiwan may encounter exorbitant risks in case of an unlikely conflict between these two neighbors. The fund is currently trading almost at par with its net asset value of $39.33.

DEM is Overweight in Taiwan and China, with Adequate Allocation in Brazil and India

WisdomTree Emerging Markets High Dividend Fund has an asset under management of $2.23 billion, and has a high expense ratio of 0.63 percent. It also has a high turnover ratio of 53 percent. DEM is overweight in Taiwan and China with almost 55 percent of its portfolio invested in these two markets.

Another 19 percent of DEM’s assets are invested in the equity markets of India and Brazil. 2023 may be a good time to accumulate equities in the Taiwanese market, as global electronics growth is set to get a boost from increasing emphasis on technology and chip-oriented electronic products. Taiwan’s GDP may still grow at a very low rate, but the prospect of the semiconductor industry is beyond any doubt. Brazil and India are again some of the cheapest larger emerging markets. All these three markets trade at discount to MSCI Emerging markets, primarily due to lack of interest of institutional investors. The average price to earnings ( P/E ) ratio of the stocks included in DEM’s portfolio also is significantly low at 8.08, as compared to the index P/E of 12.7.

Quarterly Pay-Outs Comes with a Decent Yield, but Price Return has been Disappointing

WisdomTree Emerging Markets High Dividend Fund seeks to benchmark itself with the price and yield performance of that of WisdomTree Emerging Markets High Dividend Index ("WTEMHY"). WTEMHY is a fundamentally weighted index which is composed of the best dividend-yielding equity stocks listed within the WisdomTree Emerging Markets Dividend Index. The fund used to generate a decent yield between 3.5 to 5.5 percent. However, as the price went down significantly during the past 18 months, yield went up to almost 7.6 percent. DEM has also been offering quarterly payouts since 2009. However, DEM’s payout is unpredictable and inconsistent. The fund also had weak price returns over the years, and DEM’s technical indicators have been looking weak.

DEM’s Top Investments Consist of Financial and Energy Stocks from China and Taiwan

26 out of the top 40 investments (each holding more than 0.5 percent of total portfolio) are either from China or from Taiwan. These stocks belonged to primarily three sectors - information & communication technology ((ICT)), financial, energy & metals. WisdomTree Emerging Markets High Dividend Fund has stakes in all the largest Chinese financial giants like China Construction Bank Corporation ( CICHY ), Industrial & Commercial Bank of China Limited ( IDCBY ), Bank of Communications Co., Ltd. ( BCMXY ), Bank of China Limited ( BACHF ), and Ping An Insurance (Group) Company of China Limited ( PNGAY ).

Taiwan’s Fubon Financial Holding Co., Ltd. ( FUIZF ) and Cathay Financial Holding Co. Ltd. are also part of its top investments. Chinese energy suppliers like PetroChina Company Limited ( PCCYF ), China Shenhua Energy Co Ltd ( CSUAY ), China Petroleum & Chemical Corp ( SNPMF ); and Taiwanese metal and petrochemical producers such as Nan Ya Plastics Corp, Formosa Plastics Corp, China Steel Corp and Formosa Chemicals & Fibre Corp are also integral part of overall portfolio of WisdomTree Emerging Markets High Dividend Fund.

Taiwan Focussed Portfolio Must Possess Semiconductors & Technology Hardware Stocks

Semiconductor stocks have to be an integral part of any Taiwan focused fund. This fund is also not an exception having stakes in ASE Technology Holding Co., Ltd. ( ASX ), United Microelectronics Corporation ( UMC ), Lite-On Technology Corporation, Realtek Semiconductor Corp., and MediaTek Inc. Taiwanese technology hardware developers like Hon Hai Precision Industry Co., Ltd. ( HNHAF ), Micro-Star International Co., Ltd., ASUSTeK Computer Inc. ( ASUUY ), Novatek Microelectronics Corp, Quanta Computer Inc. ( QUCCF ), AU Optronics Corp., and Gigabyte Technology Co., Ltd. also features within the top investments of WisdomTree Emerging Markets High Dividend Fund.

DEM also Bets on EMs that are Cheaper with Higher Perceived Geo-Political Risks

Some of the safest bets in emerging markets are cheaper markets with perceived high political risks (like the Brazilian and Indian markets), rather than stable markets with excessively high valuations. Major investments in these markets were primarily stocks from core industries such as Petróleo Brasileiro S.A. ( PBR ), Vale S.A. ( VALE ), Banco do Brasil S.A. ( BDORY ), Power Grid Corporation of India Limited, Coal India Limited, Oil & Natural Gas Corporation Limited and Indian Oil Corporation Limited. All these stocks cater to the basic infrastructure of these EMs - which are witnessing fast growth.

Investment Thesis

WisdomTree Emerging Markets High Dividend Fund is an emerging market ETF that invests in high dividend paying stocks of diversified companies from public equity markets of global emerging regions. With the exception of the last 18 months, the fund has been generating decent yields. It pays consistent quarterly dividends, but the pay-out has been erratic. DEM also had weak price returns over the years and DEM’s technical indicators have been looking weak. Despite its inconsistent pay-out, the fund is not a bad option for low-risk income-seeking investors, as the yield is almost certain and there is hardly any major downward price rally during the past seven years, if we ignore the covid-19 pandemic related market crash during March 2020. However, there is nothing exceptional about this fund except the market DEM is overweight on.

Almost 74 percent of its investments are concentrated on potential high growth economies like Brazil, India, China and Taiwan. Again almost 70 percent of DEM’s assets are allocated in the core economic sectors of energy, basic materials, utilities and finance. These markets trade at a compelling valuation and possess greater upside potential due to their long-term underperformance in the past decade. The Taiwanese market is poised for high growth, as global electronics growth is set to get a boost from increasing emphasis on technology and chip-oriented electronic products. However DEM’s higher exposure to China and Taiwan calls for a cautious investment on this diversified emerging market fund, as these markets may move into jeopardy, in case a conflict breaks out between these North-Asian neighbors.

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