WisdomTree’s Unconventional Emerging Markets High Dividend Yielding ETF Play (NYSEARCA:DEM)

Brief Thesis

As global demographics start to lean towards more elderly populations, an increasing number of people are looking to shore up retirement obligations and finance life in their twilight years. While sovereign banks have attempted to maintain economies on life support through hyper excessive use of monetary policy, interest rates have been crushed, forcing income investors, many of whom are retirees, to find alternative revenue streams.

With this trend has come the advent of more versatile ETF offerings – some resolutely focused on dividend distributions and other hybrids looking to emulate the safety of bonds with the returns of equity. To that point, I recently redacted an article on Aptus Defined Risk ETF (DRSK) – not exactly a pure dividend play, but another which could fit in the family of income generating plays. It is worth checking out also.

While I remain mildly bullish on dividend-focused ETFs, it goes without saying that fine print needs to be scrutinized on each occasion. WisdomTree Emerging Markets High Dividend ETF (DEM) affords investors an interesting play on the high yielding distributions thematic, but with this comes some model-related intrinsic perils. We endeavor to discover them here.

(Source: Market Chameleon)

Overview

WisdomTree Emerging Markets High Dividend ETF furnishes income-seeking investors with the ability to mix stronger potential price returns of an emerging markets product with the dependability of dividend distributions.

The ETF achieves this while resorting to dividend weighting, something the New York-based venture has been undertaking since 2006.

The case for weighting an index by its dividends resides in the possibility of magnifying sizable dividend effects on performance with those of increasing returns while stifling volatility. This kind of methodology pushes stock selection towards an over-weighting in higher-yielding essentials.

The fund filters for the highest dividend-yielding stocks in emerging markets with a range of discrete specifications:

  • Companies which have distributed $5M in previous annual cycle
  • Market capitalization of at least $200M which is liquid and actively traded

The portfolio aims to select the top 30% of firms rated by dividend yield which while providing a range of benefits, also implies a variety of risks generated by the selection methodology. Most notably, identifying dividend payments purely on the last annual cycle fails to identify any degree of continuity in dividend payments, often critical in pinpointing stable, reliable dividend payers.

Likewise, a dollar-denominated distribution target may not fully cover all risks in choosing a given underlying – such as pay-out ratios and percentage of earnings which are distributed as a dividend. These are telling and important indicators when reviewing dividend quality.

The portfolio of underlying assets is skewed towards mid-cap firms with certain sectorial bias based on the typology of dividend-paying firms (often well-established companies, stable linear growth, robust balance sheets).

Year to date returns DEB

(Source: TradingView)

Year-to-date returns have underperformed, with the fund losing -11.76% thus far, reflective of the level of recent economic destruction unleashed on emerging market equity. As you can observe with the data below, emerging markets – whether they be in Latin America, Africa, or Asia – have suffered deep-cutting, lasting impacts from the SARS-Cov-2 outbreak. Highlights include Brazil, Mexico, South Africa, Nigeria, and India.

While all global economies were impacted, often the rebound has been more sluggish in developing markets. A key outlier remains China, which surprisingly suffered little from the novel coronavirus outbreak and will report net positive GDP this year, albeit at a lower level as its key customer base (Europe, US) reels from the repercussions of economic lockdowns.

These macro-economic impacts have manifestly shown up in the price returns of WisdomTree Emerging Markets High Dividend ETF over the past year.

Index Returns for major global economies, including emerging markets

(Source: Aswath Damodaran)

Key components of the fund have found themselves directly impinged by punctual geo-political issues throughout the year – Taiwan continues to be the focal point of a lasting Sino-American face-off while Hong Kong has been decimated by unrest surrounding its governance.

Regardless of your political leanings, reality is these 2 geographies which make up a sizable part of the funds returns, have been the subject to prompt targeted strife beyond the global ramifications of the SARS-Cov-2 outbreak itself.

Russia spent a good part of 2020 in a policy-related OPEC feud which pushed oil prices to all-time lows – explaining some of the adverse price action which would have filtered through to the returns of the ETF. Notwithstanding, commodities will likely pick up moving through to 2021 and beyond – benefiting Russia which remains a commodity-focused economy.

Risks remain for Taiwan. I recently completed a detailed overview of the ETF tracking its economy (EWT). You can find a more detailed overview of Taiwan’s economic prospects here.

(Source: ETF.com)

Financials, commodity plays and global energy make up the lion’s share of the fund’s sectorial allocation – of these, it is critical to emphasize the regulatory aspects regarding financial enterprises which can have dividend allowances mandated by sovereign states (it is the case presently in the United States) due to the systemic risk they present to the world economy. This aspect could be a potential drag on distribution returns should greater regulation return to the financial sector.

Interestingly, sector choice would underscore greater volatility in returns than initially perceived, with larger representation of financials and technology firms and a much smaller representation of the less volatile sectors such as utilities and consumer non-cyclicals.

Structure

WisdomTree Emerging Markets High Dividend ETF is rather standard in its structure – it has been on the market for over a decade and since then has garnered plausible interest from the investing public, bolstering $1.67B of assets under management. For larger more widespread ETFs this is comparably small but for a more targeted offering, it is sufficiently big. Expense ratio is on the high side for such relatively standard features.

The underlying assets supporting the ETF are numerous and a reasonable distribution yield is paid quarterly. The ETF benefits from an options market which, despite having limited maturities and liquidity, is an additional tool for investors to optimize returns or protect initial investment.

(Source: Data computed by author derived from ETF.com)

Nothing really stands out when taking a deeper dive into the ETF’s structure – it remains wholly conventional but commands an expense ratio which could be perceived as being marginally on the high side given the offering’s intrinsic traits.

Key Takeaways

  • WisdomTree Emerging Markets High Dividend ETF is an ETF product which finds its home among high-yielding, income-generating ETFs particularly prized by retirees and investors in their final years.
  • It aims to produce an interesting mix – the perceived growth characteristics of emerging market equity with the stability of dividend distributions.
  • The selection system seems somewhat flawed nonetheless – only accruing for the previous cycle’s dividend in choosing a company discounts the stability with which the company has delivered dividends over a longer more enduring period.
  • Likewise, the selection system appraises dividend distributions on a cash basis and not on a percentage of earnings or alternative parameters – this implies that important criteria such as dividend pay-out ratios may not be fully appreciated in the basket of underlying firms.
  • The fund tilts notably towards financials, commodities, and technology – more than traditional, less volatile, and abundantly conventional sectors such as utilities and consumer non-discretionary.
  • The fund has underperformed year-to-date along with the underlying equities in their respective countries. Emerging markets have been considerably hit by the SARS-Cov-2 outbreak which needs to be factored in before committing capital.

WisdomTree Emerging Markets High Dividend ETF offers an interesting iteration of the traditional income generating dividend play by matching it with emerging market equities. Unfortunately, these equities have been significantly exposed to the novel coronavirus outbreak, penalizing investors for their foresight.

Yet opportunity may be on the horizon as an eventual bounce-back takes place. WisdomTree Emerging Markets High Dividend ETF merits consideration for any investor looking for a more creative play on a traditional income-generating staple.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I hope you enjoyed my ETF analysis. Be sure to click the like button and follow me for more in-depth looks at different ETF product offerings.

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