DEM Beats Out VWO And EEM

June 08, 2012

For emerging markets investors looking for alternatives to broad, cap-weighted funds like VWO and EEM, a few dividend-weighted funds look promising.

A couple of weeks ago, I blogged about looking beyond the Vanguard MSCI Emerging Markets ETF (NYSEArca: VWO) and the iShares MSCI Emerging Markets Index Fund (NYSE Arca: EEM) for emerging markets exposure.

Specifically, I mentioned a few single-country ETFs with potential for outperformance in the coming decade.

But for investors uncomfortable with jumping into country-specific ETFs and who prefer broad exposure, dividend-weighted funds like the WisdomTree Emerging Markets Equity Income Fund (NYSEArca: DEM), can offer a great alternative way to play emerging markets.

DEM differs from cap-weighted funds like VWO and EEM by not only weighting its constituents by annual dividends paid, but also by selecting its holdings based on dividend yields.

And true to its word, DEM sports an impressive dividend yield.

It might come as a surprise to you that DEM actually has a trailing 12-month yield of 4.45 percent and a 30-day SEC yield of 3.21 percent. In comparison, VWO and EEM have a trailing 12-month yield of 2.36 and 2.12 percent, respectively.

DEM's dividend-based methodology also leads to a unique portfolio with very different country exposures than what investors get in VWO or EEM via the MSCI Emerging Markets Index.

Country Weightings (in %)
EEM (MSCI EM Index) DEM (WisdomTree
EM Equity Income Index)
China 17.7 3.0
South Korea 15.1 3.9
Brazil 13.3 20.0
Taiwan 11.0 22.3
South Africa 8.1 10.2
India 6.3 0.0
Russia 5.9 1.6
Mexico 4.6 1.9
Malaysia 3.6 9.7
Indonesia 2.7 1.9
Other 11.7 25.5

Source: Issuer websites


But the real kicker here is that it's handily outperformed both VWO and EEM over one- and three-year periods in total returns—and in also in price returns.


1-Year Total Returns

Source: Bloomberg



Source: Bloomberg



The SPDR S&P Emerging Markets Dividend ETF (NYSEArca: EDIV) is also worth mentioning here. The dividend-weighted fund launched in February 2011, and while it doesn't have a long track record yet, it also beat out VWO and EEM over the past one-year period.

For emerging markets dividend plays, the iShares Emerging Markets Dividend Index Fund (NYSEArca: DVYE) is also available. The fund was only launched this past February, but it's one to watch.

But beyond simply broad-based funds, yield-hungry investors might also be interested in the WisdomTree Emerging Markets SmallCap Dividend Fund (NYSEArca: DGS), which was the first small-cap-focused emerging markets ETF to launch.

DGS also sports a handsome dividend yield, a trailing 12-month yield of 3.84 percent and a 30-day SEC yield of 7.63 percent.

Plus, DGS' small-cap tilt gives the fund significant exposure to industrials and the consumer side of emerging markets, as opposed to large, state-owned financial and energy companies that play a heavy hand in broad, cap-weighted funds like VWO and EEM.


Sector Weightings (in %)
EEM (MSCI EM Index) DGS (WisdomTree Emerging
Markets SmallCap Dividend Index)
Financials 24.0 21.5
IT 13.9 13.4
Energy 12.9 1.6
Materials 12.1 10.0
Telecom 8.1 1.3
Utilities 3.8 6.7
Consumers (Staples and Cyclicals) 16.6 21.1
Industrials 6.8 19.1
Other 1.8 5.3

Source: Issuser websites


And once again, it's outperformed both VWO and EEM over the past three-year period.



Source: Bloomberg


Now it might look like I'm picking on VWO and EEM a bit here, but because they're $54 billion and $33 billion goliaths in the emerging markets space, they've become the standard by which emerging markets ETFs are now measured against.

And while DEM's $3.4 billion in assets is nothing to scoff at, compared with VWO and EEM, the fund looks underappreciated.

This is surprising considering all the attention that dividend ETFs have gotten over the past year. Also, considering the numerous emerging markets debt ETFs recently launched, not much is talked about in terms of searching for yield in emerging markets equities.

Perhaps investors have been obsessed with emerging markets debt funds and overlooked the equity space.

Or perhaps DEM got overlooked as everyone was focused on which was better—VWO or EEM—two funds tracking the same index, while DEM was beating both funds hand over fist. Over three years, DEM outperformed both by more than 20 percent.

Still, for those wanting emerging markets equity exposure, DEM, as well as DGS, are solid plays that pay out handsome dividends.

These are just a few more alternative choices to VWO and EEM that emerging markets investors might consider before blindly chasing the most popular funds.


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