The idea of adding emerging market exposure to your portfolio sounds great in theory. These up-and-coming countries' economies and companies aren't tightly tethered to the rest of the world's, giving investors a chance to further diversify their holdings. Emerging markets also offer above-average growth potential.
In reality, though, this arena is difficult to navigate, and often yields subpar returns anyway. That's the case even if you're buying and holding emerging markets exchange-traded funds (ETFs), most of which are highly exposed to an ever-unpredictable Chinese equity market.
There are ways to work around this common problem, however, without abandoning ETFs or instead opting for individual overseas stocks. The WisdomTree Emerging Markets SmallCap Dividend Fund (DGS -0.08%) is a nice (and often overlooked) way of adding foreign holdings to your mix; the beefy dividend it pays is just a little gravy.
The WisdomTree Emerging Markets SmallCap Dividend ETF
It's not exactly a go-to name for investors on the hunt for opportunities overseas. The WisdomTree Emerging Markets SmallCap Dividend Fund has less than $3 billion worth of investor money in its pool. Maybe its dividend orientation just isn't what most people are looking for in an emerging markets holding.
Except, perhaps that's exactly what they should be looking for; these investors may end up getting some respectable growth anyway.
As of the latest count this exchange-traded fund holds on the order of 1,000 different stocks, most of which you've probably never heard of. Its biggest holdings are South Africa's Growthpoint Properties, Mexico's Banco Del Bajio, and South African coal mining outfit Thungela Resources. China Galaxy Securities and Taiwan's electronics manufacturer Wistrom Corp. round out its top five positions. And if you think those picks are off-the-radar, bear in mind those are the fund's top names. The deeper you look, the more obscure these companies get!
But, that's kind of the point ... and the appeal. These 1,000-ish companies are small, nimble, and offer rarely seen growth opportunities, but they're also built to pay a dividend.
And, they've reliably done so for years. Although the total payout varies from one quarter to the next, this variance is predictable -- the fourth-quarter payments are measurably lower than the second or third quarter's, while the first-quarter payouts are often next to nothing. On a full four-quarter basis though, these dividends (distributions, technically) are pretty consistent.
Just as important, they're also clearly growing. The total payments for the past four quarters stand at $2.32 per share. That's nearly 60% better than the ETF's annualized distributions from five years ago.
Data source: WisdomTree. Chart by author. TTM = Trailing twelve months.
At that current yearly rate of payout, newcomers are stepping into a dividend yield of right around 5%. Not bad.
There are some arguable downsides. Chief among them is the fund's inconsistent price performance. While the ETF has logged a few moments of bullish brilliance since bouncing back to life following the fallout from 2008's subprime mortgage meltdown, all of these rallies were eventually unwound. The fund is currently priced roughly where it was five, 10, and even 15 years ago.
That lack of consistent forward progress, however, may be rooted in the extraordinary circumstances of that 15-year stretch rather than a reflection of these companies' strength.
Yes, the COVID-19 pandemic was extraordinary, but it wasn't the only contributing factor behind this ETF's choppy performance. Remember, since 2008 there's been all sorts of political turbulence in Brazil, India, the Middle East, North Korea, and Africa, as well as an inordinate number of natural disasters. While the dividend-paying companies that make up the WisdomTree Emerging Markets SmallCap Dividend Index are resilient, their stocks aren't immune to near-term volatility. Indeed, their smaller size may leave them particularly vulnerable -- even if only temporarily -- to such turbulence.
The other key concern? While the dividend's been growing since 2016, prior to that it was contracting. Could it happen again? Maybe. Never say never.
Take a step back and look at the premise of the fund, and its performance, and its dividend history in their collective entirety though. This ETF is usually doing well in one way or another, but more than that it's doing well overall often when more popular benchmarks like the S&P 500 index may be running into a headwind. For instance, the ETF easily outperformed the S&P 500 back in 2009 and 2010, and did so again back between 2016 and 2018. This ever-changing market leadership is the reason you diversify in the first place... to dampen the overall impact of volatility from one market, or one industry, or even just one stock.
In this vein, perhaps the most compelling argument for choosing the WisdomTree Emerging Markets SmallCap Dividend Fund rather than other emerging market funds is that it's not overly exposed to unpredictable Chinese stocks. While it does have some exposure to China, these stocks make up less than 20% of the fund's value. Taiwan makes up more, while South Korean stocks account for about 10% of the portfolio. Brazil, India, and Mexico are each home to another 5% of the ETF's positions, making the WisdomTree fund a truly diversified emerging market ETF.
A great place to start adding emerging market exposure
A must-have fund? No, there's no such thing as an investment you can't absolutely live without. There are other worthy emerging market ETFs out there, including ones without overexposure to Chinese stocks. There are small-cap and dividend emerging market exchange-traded funds as well.
There aren't many such funds that offer all three attributes in one single package though, and there are even fewer with a Morningstar rating of four or more stars like this one.
Bottom line? Some slivers of your portfolio can be successfully populated with individual stock picks and popular ETFs. If you're ready to go off the beaten path and step into nascent regional economic growth, however, you should consider changing your tack to one with a tightly focused basket of stocks you'd likely never dig up on your own. Emerging markets are just too difficult to navigate yourself, and even more so when you're looking for dividend income.