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Dialing Overseas for Diversification

Among the bushels of new ETFs that have been listed on the U.S. market lately are 10 foreign-sector ETFs from WisdomTree. The sector funds weight their holdings in a similar manner as WisdomTree's other funds, keying off of dividends. These are unique, in that they own no domestic stocks, unlike some putatively foreign-focused funds. They have been in the works for a while, and I believe they could be useful to investors.

Out of the gate, the one that looks most interesting to me is a telecom fund called the WisdomTree International Communications Index Fund (DGG). The telecom sector is a good way to add foreign exposure to a portfolio because every country has a phone company (usually they are among the biggest), and they often pay a healthy dividend.

The fund fits the bill yield-wise -- the index that underlies it has a 4.53% yield, which is a much higher yield than the older telecom ETFs.

The fund is well diversified across 20 countries, with 20.96% of assets invested in British companies, 16.13% in France and 7.68% in Germany. Like all the WisdomTree sector funds, it excludes Canada, but it has 6.49% in Australia.

The stock selection is not as well diversified. Although there are 138 holdings, 9.9% is in Vodaphone (VOD), 9.48% in France Telecom (FTE) and 7.56% in Deutsche Telekom (DT). In fact, the top 10 holdings account for 59% of the fund's assets. While most of the other telecom ETFs are top heavy in this manner, it is still important to be aware of.

WisdomTree's promotional materials provide back-testing data that compares the fund to the MSCI EAFE Index, but I think the better comparison would be to some of the other telecom ETFs.

Telecom ETFs
Fund One year* Three-year annualized Five-year annualized
iShares DJ Telecom 17% 16% -0.63%
iShares S&P Global Telecom 14% 14.9% NA
WisdomTree Intl Communications 13.4% 16.22% 11.61%
*September 30, 2006
Source: WisdomTree

Clearly the fund holds its own. The case for owning this fund would be to complement other stocks or funds in the sector. I don't see it as a stand-alone proxy for telecom.
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