WisdomTree (WSDT.PK) is adding to its offering of international indexes and exchange-traded funds [ETFs] Tuesday with the launch of the WisdomTree Emerging Markets SmallCap Dividend ETF (NYSEARCA:DGS) on NYSE Arca.
The firm first expanded into the emerging markets arena this past July when it launched the WisdomTree Emerging Markets High-Yielding Fund (NYSEARCA:DEM). Although PowerShares offers a fundamentally weighted emerging markets ETF (NYSEARCA:PXH) based on the FTSE RAFI Emerging Markets Index, DGS is the first small-cap fundamentally weighted emerging markets ETF. In fact, it is the first small-cap emerging markets ETF to become available at all.
With investors pushing into new overseas markets in their quest for diversification, this fund could be perfectly positioned. Lately, with the growing correlation between international and domestic U.S. large-cap companies, investors are heading more and more toward international small-cap stocks and emerging markets. DGS may have appeal for investors looking to go an extra step. In theory, small-cap stocks should be more closely correlated to local economies than large-caps, making this product an interesting diversification play.
Barclays Global Investors [BGI] has a small-cap emerging markets fund in registration tied to the MSCI Emerging Markets Small Cap Index. But this is one situation where WisdomTree's dividend screen may make a great deal of sense, as it ensures to some extent that these are "real companies." It's a leap of faith to move into small-cap emerging markets stocks—who knows what the balance sheets and business profits of these companies really look like? Knowing that they produce real cash and pay out dividends could comfort a lot of investors.
The WisdomTree Emerging Markets SmallCap Dividend Index has 363 components and a total market capitalization of $550 billion, meaning the average component market capitalization is $1.5 billion. In contrast, the average component market cap of the WisdomTree Emerging Markets High-Yielding Index is $6.1 billion. Although the high-yield index includes components of all sizes, small-cap companies represent only 5% of the total market cap.
Also, DGS is heavily weighted toward the Industrials sector, which represents 26.06% of the index, followed by Consumer Discretionary (17.55%), Financials (13.83%), Materials (12.12%) and Information Technology (10.82%). DEM has a much different sector weighting configuration. Its heaviest weighting is in the Materials sector at 21.69%, followed by Energy (20.50%), Financials (15.36%), Telecommunication Services (15.33%) and Industrials (6.69%).
While DGS only includes components from 14 countries, DEM includes components from 16, although the WisdomTree universe includes 19 emerging markets. The small-cap fund's top five countries are Taiwan (24.32%), South Africa (14.37%), Korea (12.52%), Thailand (11.69%) and Malaysia (9.97%). Meanwhile, DEM's top five countries are much the same except for one major exception. Taiwan is the largest with a 27.02% weighting, followed by Brazil (12.87%), South Africa (8.49%), Korea (8.28%) and Thailand (8.23%). Although it is a large part of DEM, Brazil is one of the smallest countries in DGS, where it only has a 2.29% weighting.
Not surprisingly, the yield for DEM's underlying index is much higher, 5.66% versus 4.39% for DGS's index. And while DGS's index has the higher PE ratio at 16.48 versus 15.11 for DEM's index, it is still quite reasonable.
DGS has an annual expense ratio of 0.63%.
Written by Heather Bell
More on Emerging Market ETFs