Is Our Favorite Emerging-Markets Equity ETF Getting Riskier?
Last year's rebalance resulted in some significant changes in the fund.
WisdomTree Emerging Markets Equity Income (DEM) has long been our favorite exchange-traded fund for emerging-markets equity exposure, thanks to its significantly lower volatility relative to the MSCI Emerging Markets Index and stellar trailing five-year risk-adjusted returns. Unlike most passive funds that track a market-cap-weighted index, DEM tracks a dividend-weighted index. Once a year on May 31, the fund rebalances its portfolio, using total dividends paid by the firms in its investable universe over the past year to inform its position weightings. Last year's rebalance resulted in some significant changes to the fund’s profile, and we think DEM may be a more risky fund in the near term, relative to its recent history.
Most dividend funds weight their holdings by stocks’ dividend yield, but DEM’s methodology is different. At the May 31 rebalance, DEM’s benchmark index screens the universe of emerging-markets stocks for firms that have paid out at least $5 million in regular cash dividends over the past 12 months and have met certain market-cap and liquidity requirements. These companies are then ranked by dividend yield, and the top 30% are selected for inclusion in DEM’s index. Constituents are weighted by dividends paid, measured by trailing 12 months dividends per share multiplied by shares outstanding, converted into U.S. dollars. This methodology attempts to create a relatively high-yielding fund with a large-cap tilt (larger companies tend to pay a higher total amount of dividends) and a slight value tilt. (At the rebalance, the index tends to sell lower yielding companies and buy higher-yielding companies).
Patricia Oey does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.