Emerging-Market ETF Weathers the Downturns

I've been a fan from the beginning, albeit with certain caveats, of WisdomTree's dividend-weighted investment products and continue to believe in this methodology for delivering a relatively smooth investment ride over the entire stock market cycle.

This type of investment has a couple of long-term advantages working for it. One is that dividends account for about 40% of total stock market returns over very long periods of time. The other factor is that large dividends often come from value stocks, and value tends to outperform growth over very long periods of time.

Case in point is the WisdomTree Emerging-Markets High-Yielding Equity Fund (DEM Quote), an exchange-traded fund I first profiled in a July 2007 column. Since its inception, DEM has outperformed the benchmark iShares MSCI Emerging Market Index Fund (EEM Quote) by more than 10% -- a significant margin for such a short period.

Looking at the chart below, it's obvious that in the early days of DEM, it trailed EEM. However, in the the last few months, as EEM has rolled over, DEM has held up much better through the decline. In short, DEM has offered a smoother ride for investors.

DEM vs. EEM: A Fund Performance Comparison

Click here for larger image.

The reason why DEM has weathered the recent decline better than EEM is not obviously apparent from looking under the hood, as the differences between DEM and EEM are not stark.

The first major difference, however, is their weighting to Brazil. DEM is weighted 8.89%, vs. 16.4% for EEM. This difference in market exposure is significant, because in the last three months, Brazil's Bovespa Index has dropped 22% as the entire commodity theme has been either unwinding or correcting (depending on your view).