What is DEM? (Pros, Cons, and Strategies)

When diversifying a portfolio, international exposure, especially in emerging markets, becomes crucial. One viable option is the WisdomTree Emerging Markets High Dividend Fund, commonly known as DEM. In this blog post, we will discuss what DEM is, its key features, advantages, disadvantages, and investment strategies.

What is DEM?

DEM is an exchange-traded fund (ETF) that focuses on high-dividend-yielding companies in emerging markets. DEM stands for WisdomTree Emerging Markets High Dividend Fund.

DEM seeks to track the price and yield performance—before fees and expenses—of the WisdomTree Emerging Markets High Dividend Index. This index emphasizes companies in emerging markets that not only pay high dividends but also have the potential for dividend growth.

Key Features of DEM

• Companies must pay high dividends relative to the emerging markets universe.
• Firms must have market capitalizations of at least $200 million.
• Companies included must have a minimum 3-month average daily trading volume of at least $200,000.

The methodology ensures that the index selects companies from emerging markets that are not only capable of paying high dividends but also show a capacity for financial stability and growth.

DEM Composition

DEM includes high-dividend-yielding stocks from various sectors, focusing primarily on financially stable companies within emerging markets. This might include well-known corporations in sectors such as financials, energy, and telecommunications, which are prevalent in regions like Asia, Latin America, and Eastern Europe.

Pros of DEM

High Dividend Yield

DEM is designed to provide a higher dividend yield compared to broad-based emerging market ETFs. This is particularly attractive for income-focused investors looking for stable dividend payments. Historically, DEM's dividend yield has been consistently higher than many other emerging market funds, making it an appealing choice for those seeking regular income.

Diversification

By investing in DEM, investors gain exposure to a wide array of emerging market stocks, spreading risk across different sectors and geographies. This diversification can potentially lead to higher growth compared to developed markets due to the rapid economic growth often observed in emerging markets.

Potential for Capital Growth

Emerging markets are known for their substantial growth potential. Investing in DEM gives investors access to the economic growth and increasing consumer demand in these regions, which can lead to appreciation in stock prices and, consequently, capital gains over the long term.

Cons of DEM

Market Volatility

Emerging markets are generally more volatile compared to developed markets. Political instability, economic fluctuations, and currency risks in these regions can lead to increased volatility in DEM's stock prices. Thus, investors must be willing to tolerate significant fluctuations in the market value of their investments.

High Expense Ratio

Compared to U.S.-focused ETFs, DEM has a relatively higher expense ratio, currently around 0.63%. This higher fee can eat into potential returns, particularly over the long term. As a result, investors must weigh the cost against the potential benefits from high dividend yields and capital growth.

Currency Risk

Since DEM invests in companies based in emerging markets, changes in currency exchange rates can impact returns. If the local currency depreciates against your home currency, the value of dividends and capital gains may decline, affecting overall returns.

DEM Investment Strategies

Given its unique set of characteristics, DEM is not for everyone. However, for those who understand the risks and benefits, it can be a valuable part of a diversified investment strategy.

Long-term Investment Approach

For investors planning long-term investments of at least 5 to 10 years, DEM offers significant advantages. Its focus on high-dividend-paying companies provides a steady income stream, while the growth potential of emerging markets can lead to capital appreciation over time. Such an approach requires patience and a tolerance for market volatility but can be rewarding in the long run.

Rebalancing to Maintain Diversification

Adding DEM to a diversified portfolio requires regular rebalancing to ensure the correct asset allocation. Emerging markets tend to have higher volatility, so monitoring and adjusting the weight of DEM in your portfolio can help manage risk and maintain an optimal asset allocation.

Income-focused Strategy

If your primary goal is income generation, consider integrating DEM with other high-yielding assets. DEM's high-dividend yield can complement other income-producing investments like REITs, bonds, or U.S.-based dividend ETFs. This mixed approach can enhance overall portfolio yield while diversifying sources of income.

Conclusion

DEM offers a compelling option for investors seeking diversification and high yields from emerging markets. While it comes with its own set of risks, including higher market volatility and currency risks, its potential for high dividend income and capital growth is considerable. If aligned with your investing goals and risk tolerance, DEM can be a valuable component of a diversified investment strategy, particularly for those focused on long-term growth and income.