Emerging Small-Caps With Punch

 | Sep 30, 2012 | 11:00 AM EDT
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Last week, I wrote about some of the top holdings in the MSCI Emerging Markets Index Fund (EEM). Another emerging-market ETF that has been on my radar recently is the WisdomTree Emerging Markets SmallCap Dividend Fund (DGS).

You don't necessarily think of small-caps and dividends at the same time. This fund, which is pegged to WisdomTree's own Emerging Markets SmallCap Dividend index, seeks to give investors heavier exposure to consumer and manufacturing stocks than they would find in the benchmark MSCI Emerging Markets index. The index is dividend-weighted, rather than market-cap weighted, an approach found in other WisdomTree ETFs. Overall, DGS has a dividend yield of 3.1%.

For some investors digging into the fund's details, the expense ratio may be of concern. At 0.64%, it's higher than what you would find in a standard-issue index ETF, such as one of the SPDRs. However, keep in mind that many of the top holdings within DGS are not available as U.S.-listed American depositary receipts. From that perspective, it's a way to get exposure to small, dividend payers that most U.S. investors wouldn't get otherwise.

Top sectors in terms of holdings are financials, industrials, consumer discretionary, materials and information technology. Top country allocations are Taiwan, South Korea, Thailand, Malaysia, South Africa, Brazil, Turkey, Chile, China and Indonesia.

Despite a low-volume pullback in recent weeks, DGS is up 11% year to date.

One holding in the fund is actually another exchange-traded vehicle: The Barclays iPath India ETN (INP). This ETN is a fairly large holding within DGS. It's been on a tear in recent weeks, and is up 15.1% for September. As U.S. indices were trading to the downside Friday, INP advanced 0.8% in heavy volume.

The fund seeks to deliver returns corresponding to the MSCI India Total Return Index.

DGS also holds a small number U.S.-listed ADRs. Russian steel producer Mechel (MTL) is included in that group. This stock was a growth leader between 2006 and 2008, but has since fallen from grace. Analysts are eyeing an earnings decline in 2012, to $0.80 per share -- but that's expected to turn around next year, with targets of 76% growth to $1.41 per share.

Mechel's dividend yield is 2.8%, but use caution if you're buying a single stock on a steep decline just because you want to grab the dividend. Mechel is down nearly 17% year to date. Furthermore, revenue has been on the decline.

Another ADR that's part of DGS is Telecom Argentine (TEO). This is another name that single-stock buyers may want to think carefully about before jumping in. As with Mechel, this stock has been on the decline throughout this year, but its 2012 slump is even more pronounced, at 44%. Earnings performance is expected to be moribund in the next two years, with analysts eyeing a 2012 gain of just 2%, and a 2013 decline of 2%.

 Another Argentina-based holding is IRSA Investments and Representations (IRS). This stock, too, is underperforming the wider market. The company is a real estate developer, focusing on shopping malls, offices, hotels and residential properties.

So far this year, IRSA has lost nearly 33%. The fundamental potential could be bright, however, with analysts anticipating earnings of $1.30 per share this year, an increase of 18%. Next year, that is seen rising another 20%, to $1.56 per share.

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