The emerging markets ETF conversation, at least the
multi-country fund level, is often dominated by two names: The
Vanguard MSCI Emerging Markets ETF (NYSE:
) and the iShares MSCI Emerging Markets Index Fund (NYSE:
). Not only are VWO and EEM the two largest emerging markets
by assets, they are two of the largest ETFs of any stripe.
As of the size these two funds was not enough, Vanguard shook
up the ETF community earlier this year when it announced it would
drop MSCI indexes on 22 of its funds, including VWO. Probably
unintended, but even more notoriety was brought to EEM and VWO,
which begin using the FTSE Emerging Markets Index next year.
Arguably, it is hard for another comparable ETF to get a
foothold against stalwarts such as EEM and VWO. Fortunately for
investors that are seeking additional choices, at least one ETF
represents a credible alternative to EEM and VWO: The WisdomTree
Emerging Markets Equity Income Fund (NYSE:
By assets, the WisdomTree Emerging Markets Equity Income Fund
is not nearly the size of its more heralded rivals, but it is by
no means small. And its asset growth has been nothing short of
impressive this year. In late February,
DEM topped the $3 billion in AUM mark
. As of November 28, the fund had nearly $4.5 billion in assets:
DEM's AUM total has grown by nearly 50 percent in 10 months.
Obviously, the income component to DEM is what really sets the
fund apart. VWO has a trailing 12-month yield of 3.44 percent.
EEM's is 1.98 percent. DEM's
is nearly six percent
. This chasm is odd considering that many emerging markets
equities can be viewed as legitimate dividend stocks.
"Emerging market equities, by and large, are dividend payers.
By our count, over 90% of the market capitalization of emerging
market equities are in dividend-paying stocks," WisdomTree
Research Director Jeremy Schwartz said in a note.
Not surprisingly, those dividends make a difference. Over the
past three years, DEM is up 20.1 percent including dividends
paid. That is quadruple the performance of EEM and better than
double VWO's returns. Over that time period, DEM has also been
300 basis points less volatile than VWO and 400 basis points less
volatile than EEM. The WisdomTree Emerging Markets Index
(WTEMHY), which recently turned five, has been consistently less
volatile than is MSCI counterpart.
"Since inception, the WTEMHY's beta relative to the MSCI EM is
.80, showing 20% lower beta (or risk) compared to the 1.0 beta of
the MSCI EM,"
Noteworthy is the fact that DEM's index has not only trumped
the MSIC Emerging Markets Index over the past five years, it has
also beaten the FTSE Emerging Markets Index, the one that VWO is
There are significant differences between these emerging
markets indexes. For example, FTSE does not view South Korea as
an emerging markets, so when VWO makes the switch, it will no
longer feature South Korean equities. EEM currently has a weight
of 15.4 percent to that nation while DEM devotes less than three
percent of its weight to South Korea. As another example, DEM's
weight to Russia more than double that of EEM's.
Both funds allocate about 12 percent to Brazil. That is one
similarity, but another major difference includes DEM's 5.4
percent to Thailand, one of the best developing nations,
economically speaking, over the past several years. The MSCI
Index allocates barely more than two percent to that country.
"I believe those analyzing the differences in those indexes
should expand the comparison and also consider new alternatives
to indexing that provide different stock selection, weighting and
risk-return dynamics. I believe that the last five years were a
critical stress test of any index methodology, and the WTEMHY has
a real-time track record that is impressive compared to
traditional market cap-weighted benchmarks," said Schwartz.
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