The emerging middle class referenced last week is both the effect and the cause of the continuing evolution of global markets. Thomas Friedman notes that the most highly evolved global businesses no longer talk about ‘outsourcing.’ That’s so 42 seconds ago in a 4G world.
Instead, he posits, there is no in- or out- anymore. There is, instead, a multi-national supply chain that allows an efficient business to design, build, assemble, transport, market, sell, and distribute wherever and however it is most profitable to do so. The notion of an ‘exported’ product increasingly fails to describe how commerce is changing.
While this does not play well with the political right in the U.S., who see this as a leaking half-empty glass of economic decline, the continuing development of the global supply chain does underlie enormous new middle class consumer markets in Asia, South America, and ultimately Africa.
Politics aside, as an investor, you should consider a strategic weighting that accounts for this trend.
DEM, the WisdomTree Emerging Markets Equity Income Fund (ETF), is one vehicle for filling out part of the emerging market sleeve in your strategic asset allocation. DEM follows its own fundamentally weighted index based on Wisdom Tree’s Emerging Markets Dividends Index, taking the top 30% based on yield, market cap, and liquidity.
The ETF breaks down to 26.6% financials, 19.6% telecom services, 13.7% IT, 10.2% utilities, 9.9% materials, 7.3% consumer staples, 4.9% industrials, 3.9% energy, and so on. Regionally, it holds 22% Brazil, 21% Taiwan, 9.3% South Africa, 9% Malaysia, 5.1% Chile, 3.9% Turkey, 3.8% South Korea, 3.7% Thailand, 3.4% Israel, 3.3% China, 3.3% Czech Republic, 2.4% Poland, and so on.
The $3.1 billion fund holds 285 positions, and charges a relatively steep .63% expense ratio. It’s seen about $1 billion inflow since 12/31/11, as money has flooded into emerging markets after a disappointing 2011. On rising price this year, its trailing four-quarter distribution yield has slipped below 4% to 3.9%. DEM closed 2011 at 51.27, and today is pushing 58.09, up 13.3% for the year on price, trailing the MSCI Emerging Markets Index which is up 16.47% YTD.
The pros and cons of various types of indexing is beyond the scope of this post, but DEM’s dividend weighting and broad global coverage make it an interesting bellwether. Much like sector funds within the S&P 500, DEM’s indexing formula highlights the shifting market value of fundamentally rated businesses across sectors and across emerging country/regions. If you’ve an interest in tracking the emergent among the emerging, DEM provides some interesting clues. Brazil and Taiwan, as rated by DEM’s value formula, outweigh the next two, South Africa and Malaysia by over 2x, and the next Chile, by almost 4x. Turkey ranks just above South Korea on this value scale.
There are of course skews in Wisdom Tree’s method, as in any. But it casts some light on the post-outsource post-export economy that is gathering momentum. And with a 17+% total return for your trouble. As always, contact me or another adviser and perform your own due diligence before making any investment decisions.
Disclosure: I am long DEM.