Emerging Markets Both Leader and Laggard

Associate Director, Research

Earlier this year there were expectations that a global economic recovery would be a boon for the export-reliant and commodity-sensitive emerging markets (EM). 

Fast-forward to August, and the MSCI Emerging Market Index (measured in local currency) is the worst-performing broad index we track—up just over 3% compared to the nearly 15% gain of the MSCI ACWI

The best performing? The EM small-cap index. 

Our Global Head of Research, Jeremy Schwartz, wrote about the rally in EM small caps in a recent blog post. 

Year-to-Date MSCI Index Returns (in Local Currency)

Figure 1_Year-to-Date MSCI Index Returns

Another area of the EM market that has similarly shined amid headline risk in China tech stocks  is high dividend payers. 

The highest dividend quintile within the MSCI EM Index has outperformed the bottom dividend quintile by over 1,000 basis points (bps) and outperformed non-dividend payers by nearly 3,000 bps.

MSCI Emerging Markets Index: Year-to-Date

Figure 2_Dividend Yield Quintiles

At the fall 2020 annual rebalance of the WisdomTree Emerging Markets High Dividend Index (WTEMHY), we implemented several risk screens to mitigate exposure to the riskiest dividend payers in the EM universe.

As a by-product of this screen—and a result of natural under-weights to China’s tech sector—the Index has experienced significantly lower volatility than the broad MSCI EM Index while handily outperforming it. 

Index Performance since 10/22/20

Figure 3_ Index Performance since 102220

While we are still constructive on the long-term growth potential of many of these Chinese tech companies, the near-term uncertainty of a more heavy-handed regulatory environment in China has weighed on the benchmark index’s recent returns. China makes up nearly 35% of the index’s weight.

Index Performance since 10/22/20

Figure 4_Index Performance since 102220_graph

WisdomTree’s high dividend Index has under-weight allocations to the companies—mostly in the Information Technology, Communication Services and Consumer Discretionary sectors—that have been the main targets of China’s regulatory crackdown. 

The Index has also been over-weight in the value sectors like Financials and Materials that have been beneficiaries of an improving global economy and a rally in commodity prices. 

Index Sector Weights

Figure 5_Sector Weights

From a country perspective, the WisdomTree high dividend Index has a much smaller allocation to China than the broad MSCI EM Index, at less than 20%. That under-weight allocation to China is offset by heavier allocations to Taiwan and Russia. 

Top Country Weights 

Figure 6_Top Country Weights

A Higher Active Share EM Solution 

Since its inception in 2007, the WTEMHY has outperformed the MSCI EM Index by 84 bps annualized. 

The outperformance was achieved with less risk over the full period, albeit with similar volatility to the benchmark in more recent years. 

We think this approach to targeting quality dividend payers can provide a solution for investors interested in enhancing potential income for portfolios, as an active management solution, and/or to tap into a higher inflation thesis, given its tilts to the Materials, Financials and Real Estate sectors. 

While its absolute volatility levels are similar to, or below, that of the MSCI EM Index, the WisdomTree high dividend Index has an active share of 88%, resulting in a high tracking error

In a challenging year for the headline EM index, some investors may prefer a diversifying allocation with lower correlation to EM beta. 

Index Calendar Year Relative Returns

Figure 7_Index Calendar Year Relative Returns

Important Risks Related to this Article

Investments in emerging, offshore or frontier markets are generally less liquid and less efficient than investments in developed markets and are subject to additional risks, such as risks of adverse governmental regulation and intervention or political developments.

For more investing insights, check out our Economic & Market Outlook


About the Contributor
Associate Director, Research
Matt Wagner joined WisdomTree in May 2017 as an Analyst on the Research team. In his current role as an Associate Director, he supports the creation, maintenance, and reconstitution of our indexes and actively managed ETFs. Matt started his career at Morgan Stanley, working as an analyst in Treasury Capital Markets from 2015 to 2017 where he focused on unsecured funding planning, execution and risk management. Matt graduated from Boston College in 2015 with a B.A. in International Studies with a concentration in Economics. In 2020, he earned a Certificate in Advanced Valuation from NYU Stern. Matt is a holder of the Chartered Financial Analyst designation.