DEM: Emerging Market Equities With A 4.98% Yield Are Worthy Of A Closer Look

By | November 5, 2015

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Summary The individual company allocations won’t be familiar, but the sector allocations and country allocations can be analyzed well. The expense ratio is simply too high for my taste. The sector allocation looks fairly aggressive, but I do like the idea of getting telecommunications exposure through an emerging market ETF rather than emphasizing it in domestic equity. Allocations to Brazil and South Africa are offering investors the opportunity to incorporate exposure to South America and Africa into their portfolio. The WisdomTree Emerging Markets Equity Income ETF (NYSEARCA: DEM ) offers great yields and appealing allocations to underrepresented countries and continents. The expense ratio is a pain, but the yield looks fairly nice. Expenses The expense ratio is .63%. This is certainly too high for my taste, and that is unfortunate, because there are some really nice things about this ETF. Dividend Yield The yield is currently running at 4.98%. For an income investor, this sounds like a beautiful way to get some of the emerging market exposure. Holdings I put grabbed the following chart to demonstrate the weight of the fund’s top 10 holdings: (click to enlarge) When looking at the emerging market company allocations, I don’t expect to be very familiar with the companies. Rather than focus heavily on the individual companies, I prefer to look into the sector breakdown and country allocations for the ETFs. Sectors (click to enlarge) The sector allocation here is fairly interesting. It feels like when I’m researching WisdomTree ETFs, I’ve simply come to expect high allocations to the financial sector. I’m not thrilled seeing it, but the positions are establishing a very significant amount of income for investors in this sector, and the weak income on equity investments in foreign markets can be a disincentive for retirees to grab enough foreign equity to optimize their portfolio for risk-adjusted returns. The thing I do like seeing here is the heavy allocation to the energy sector and telecommunications services. I’ve been bearish on domestic telecommunications because the market has become so competitive relative to previous years, but it is still developing in many countries. I like the idea of getting telecommunications exposure and emerging markets exposure at the same time, so that allocation is great. Investors should take note that this fund is fairly low on consumer staples and utilities, which tend to be more resilient to market weakness, so there is the potential of some fairly substantial price movements. If an investor is going to run with this kind of aggressive high yield portfolio, they should be ready to rebalance and raise allocations if the shares are falling as part of a bear market. Country The country allocations are another major area of importance for establishing proper diversification. (click to enlarge) I have to admit, this is a fairly interesting allocation. I’d be a bit concerned that the top countries receive such a heavy allocation, which would make me favor combining this ETF with another one or two to round out the international exposure. In those ETFs, I’d be looking for lower weights on the top three countries here to enhance the diversification. The nice thing is that I’m seeing substantial allocations to South Africa and Brazil, which provides this ETF with exposure to continents that are often marginalized or excluded from international ETFs. South America and Africa are the most common continents for being mysteriously left off of international funds, so I find this allocation fairly attractive for diversification. Conclusion The yield on this ETF is great, but the expense ratio is not. Since the companies represent emerging markets, they will generally be unknown to domestic investors, but the sector allocation and country allocation give us some perspective on how the ETF should be performing. The sector allocations feel fairly aggressive, and investors using this fund may want to control for that by being prepared to rebalance if the share prices take a hard hit. The country allocations are the high point of the portfolio. The countries represented in this portfolio, and the continents they are on, are often excluded or marginalized in other international funds. For this high yield, if the expense ratio was dropped down and the sector allocation was modified to be slightly more defensive, this fund would be very interesting. I should point out that the total returns on the fund left a great deal to be desired over the funds history, but the last 8 years have shown dramatically superior domestic performance than international performance, so investors should take the weak past performance with at least a few grains of salt. Scalper1 News

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