A New Emerging-Markets Dividend Growth Fund

NEW YORK ( TheStreet) -- Investors in exchange-traded funds continue to demand yield, and ETF providers are scrambling to meet that demand.

The latest offering is the WisdomTree Emerging Markets Dividend Growth Fund ( DGRE).

This comes on the heels of the recently listed EG Shares Emerging Market Dividend Growth ETF ( EMDG).

The dividend growth strategy is based on the idea that the dividend income stream will grow faster than inflation. What's more, companies with histories of dividend growth have often outperformed the broad market.

WisdomTree doesn't simply populate its fund with stocks that have increased dividends over five years (or some other period). Instead, the company takes the stocks from the WisdomTree Emerging Markets Dividend Index and ranks them based on expected long-term earnings growth and the three-year averages for returns on equity and returns on assets. From there, the highest scoring companies are weighted in the index by the dividend paid.

The methodology is not simple, but as is the case with all of WisdomTree's funds, the firm provides plenty of research at its Web site to explain the methodology.

The resulting product ends up looking much different than the similarly named EG Shares fund. DGRE's heaviest country exposures are Brazil and South Africa, both at 14%; followed by at Indonesia at 13%; and Russia, Mexico and Thailand, each with about 10%. China has only a 7% weighting in DGRE, vs. 19% in EMDG from EG Shares.

The largest sectors in DGRE are telecom and consumer staples, which each have 18% weightings, followed by financials and materials, which each have 13% weightings. By comparison, the largest sectors in EMDG are financials, at 20%, followed by energy at 17%.

Many of DGRE's holdings will be familiar to U.S. investors. They include Taiwan Semiconductor ( TSM), which is the largest holding in the fund at 5%. EMDG specifically excludes Taiwan because some index providers don't consider Taiwan to be an emerging market, but TSM is the only Taiwanese holding in DGRE.

If there is to be any meaningful performance dispersion between DGRE and EMDG it would seem to come from EMDG's more than 8% weighting in Chinese banks compared to less than 1% for DGRE. China has a very clear bear case based on overcapacity, slowing growth and an overextended financial sector.

An ETF investor who wants broad-based emerging-market exposure in his or her portfolio and is concerned about China would logically look to a fund such as DGRE.

That the biggest Chinese banks don't succeed in DGRE's screening process for growth and quality might support the idea that the Chinese financial sector is indeed on shaky ground for the foreseeable future.

Another potential source of divergence between the funds could come from their respective energy exposures. DGRE has almost 8% in energy compared to 17% for EMDG. A pronounced move higher would seem to benefit EMDG.

As is the case with most dividend growth funds, DGRE's yield is not especially high. The reported yield for the underlying index is 3.42%, which, after accounting for the 0.63% expense ratio, could give the fund a 2.79% yield.

That may not seem like much yield, but the objective is to create an income stream that will at the very least keep up with inflation.

An investor interested in trying to maximize yield right now could consider the EG Shares Low Volatility Emerging Market Dividend ETF ( HILO), which has a trailing yield of 5.3%.

At the time of publication, Nusbaum had no positions in stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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