SPEM - DGS: A Momentum Reversal In An Otherwise Good Fund

2023-10-27 15:55:32 ET

Summary

• WisdomTree Emerging Markets SmallCap Dividend Fund ETF has performed well but is currently vulnerable.
• The DGS ETF provides exposure to small-cap equities of dividend-paying companies in emerging markets.
• The fund has outperformed larger emerging market funds but has lagged behind the S&P 500 index.

We may be a small island, but we are not a small people. - Edward Heath.

Emerging markets have been a brutal part of the investable landscape to allocate to for well over a decade (believe me - I know). Most investors use broad market-cap weighted proxies, but the small-cap side has really been the place to be on a relative basis. To that end, the WisdomTree Emerging Markets SmallCap Dividend Fund ETF ( DGS ) is an interesting fund that's done well but looks quite vulnerable right now.

DGS is an exchange-traded fund, or ETF, that strives to replicate the performance of the WisdomTree Emerging Markets SmallCap Dividend Index, before accounting for fees and expenses. This index is comprised of primarily small-cap stocks chosen from the broader WisdomTree Emerging Markets Dividend Index. Inception of the fund dates back to October 2007. The fund's total expense ratio stands at 0.58%, and it's very well diversified.

Key Features of DGS

DGS provides investors with exposure to primarily small-cap equities of dividend-paying companies in emerging markets. This characteristic allows investors to tap into local economic growth and satisfy their demand for potential growth and income. It also had a good amount in mid-caps as well.

The DGS fund follows a particular investment strategy to select its holdings. Companies eligible for inclusion must meet specific criteria, such as being investable by foreign institutions, having a market capitalization of at least $100 million, and having paid regular cash dividends in the preceding 12 months. A risk score based on momentum and quality metrics is also employed to filter out potential yield traps. This actually makes for a well-valued fund, with valuation metrics like Price/Earnings, Price/Book, and Price/Sales ridiculously cheap relative to the U.S.

The fund invests in several emerging economies, with a significant concentration in Taiwan and South Korea. Note that this is actually a big differentiator relative to broad large-cap emerging market funds which typically have China as the largest allocation.

The fund's top sectors include technology, financials, and industrials, each accounting for between 13% and 18% of the fund's assets.

DGS Holdings

The top ten holdings of DGS account for around 8% of its total assets. These include Old Mutual Ltd, Banco del Bajio SA, Chicony Electronics Co Ltd, Truworths International Ltd, among others. Each of these holdings has a weight of less than 1%, indicating a low concentration risk related to individual stocks.

Performance Analysis

Since its inception, DGS has meaningfully outperformed its larger more popular emerging market brethren like the Vanguard FTSE Emerging Markets Index Fund ETF Shares ( VWO ), the iShares MSCI Emerging Markets ETF ( EEM ), and the SPDR Portfolio Emerging Markets ETF ( SPEM ). However, it's important to note that the fund's performance has lagged behind the S&P 500 Index (SP500). The reality is this has been the way to play emerging markets with hindsight, but most of that outperformance came really post 2021 and likely can be attributed mainly to the lower weighting towards China.

Risk Considerations

While DGS provides an opportunity to invest in high-growth emerging markets, it's important to be aware of the associated risks. The fund has a significant exposure to geopolitical risks related to China, given that Taiwan is a major allocation in the fund. Additionally, despite being an emerging market fund, it's highly concentrated in large economies, making it susceptible to economic fluctuations in these regions.

The bottom line? WisdomTree Emerging Markets SmallCap Dividend Fund ETF is a good fund, offering a blend of growth potential and income focus. However, while DGS has outperformed broader emerging market large-cap proxies, its momentum has abruptly turned around here, and I think it's worth holding off on allocating any new positions now as global risks mount for all risk assets.

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