In Emerging Market ETFs, a Compelling Argument for WisdomTree's DEM

One's been around the longest. One has a better cost structure. And one has a big, fat, juicy yield.

For sheer comfort, emerging market investors may be swayed by the iShares MSCI Emerging Market Index (EEM). It is well-diversified across sectors and emerging countries. And it's been trading for more than 5 years.

Unfortunately, it has a cost structure that is somewhat punitive with a 0.75% annual expense ratio. The way the emerging market profits have rolled in for investors, few seem to pay much attention to the expense. That said, cost tends to play a much bigger role over time.

Vanguard's Emerging Market Fund (VWO) deserves a look due to the parent company's devotion to low-cost ETF leadership. It has equally solid diversification across sectors and countries as its predecessor, the iShares Emerging Market Index (EEM). Yet VWO costs the investor a mere 0.30% per year.

Over time, the lower your costs, the higher your returns. One may not be able to see this in a 2-year chart. But one can see that they track each other almost identically. It follows that over 10 years, you are likely to see Vanguard's Emerging Market Fund outperform due to compounding of an additional 1/2 percentage point.

While lowering one's costs increases one's returns, enhancing one's dividends fosters greater results as well. This is why I've been particularly intrigued by the WisdomTree Emerging Market High Yield Fund (DEM).

Since its inception in mid-July 2007, in the middle of the credit crunch, DEM has been less volatile than either EEM or VWO. Many attribute the reduced volatility to the quality of an index that includes more established emerging market corporations; historically speaking, companies that pay dividends to shareholders tend to be more established than those that do not pay dividends.

Indeed, reduced volatility is a huge plus. Then again, so is a 5.5% annualized yield... just for participation. According to Yahoo Finance, Vanguard's Emerging Market Fund (VWO) is paying about 2% in dividends while the iShares MSCI Emerging Market Index (EEM) is paying approximately 1.5%.

One of the fears that I might have had with a dividend-oriented fund like the WisdomTree High-Yielding Emerging Market Index Fund (DEM)? What is the exposure to financials? Yet it turns out, financials is not even in the top 3 sectors in this well-diversified emerging market vehicle.

What's not to like? Taiwan is weighted at 27%, which may be a bit higher for most people's emerging market tastes. For me, though, I've lived in Taiwan. I have plenty of confidence in this Asian Tiger's ability to thrive.

And the chart is speaking for itself. In a brief period, DEM is outperforming its chief competitors.

Disclosure: Author's company may hold positions in the ETFs, mutual funds and/or index funds mentioned above.

Comments

[NC Investor:]

DEM seems to provide an annual dividend of $0.49 that would suggest a yield of 0.9%. How do you arrive at a yield of 5.5%?

2008 May 21 09:03 AM

[Roger Nusbaum:]

Unfortunately the yield of the fund is nowhere near the yield of the index. This is something I have come to learn more about in the last few months. DEM paid $0.48 last december when the fund was trading near $50--so about 1%.

Asset growth seems to be the thing with this. The fund collects divs throughout the year but then the asset growth of the fund means they have to pay out those divs over many more fund shares.

DEM has been the best performer per your chart so the point about the div is not a reason to avoid but actually collecting 5% is a tall order.

2008 May 21 09:21 AM