Stocks have pulled back sharply this year for multiple reasons including interest rates rising, but a key reason is that valuations were stretched a bit far relative to earnings, book value and dividends, suggests Carl Delfeld, international investing expert and editor of Cabot Explorer.

This was not the case for many international markets and the strong U.S. dollar has made them extremely cheap. Sir John Templeton, the dean of international investing, called this sort of market situation a sign of “maximum pessimism,” and a good time to buy.

This brings us to the WisdomTree Emerging Markets High Dividend ETF (DEM), a basket of high dividend stocks based in Latin America, Eastern Europe, and Asia.

Emerging markets make up about 80% of the countries in the world, representing 77% of the world’s landmass and 85% of its population. These countries now represent roughly 60% of total global GDP while just two decades ago they accounted for only 23%.

Every day, approximately 150,000 people in emerging markets move from the countryside to cities in search of better opportunities. From education to health, infrastructure to financial markets, these nations have made major strides. Companies, domestic and international, are making a lot of money meeting the wants and needs of these 6.6 billion people, as they become an upwardly mobile world middle class.

Yet it seems that most investors have zero or little direct exposure to these dynamic markets while I recommend that you have about 10% of your equity portfolio in emerging markets.

WisdomTree Emerging Markets High Dividend ETF covers 17 different emerging markets and gives broad exposure to large caps, mid-caps and small caps in these countries. This ETF has a clear income and value strategy. The stocks in its basket tend to be conservative, defensive companies with low valuations and high dividends.

And WisdomTree makes adjustments to the portfolio every year to make sure the companies in the ETF basket are in the top 35% of emerging market companies by dividend yield.

Furthermore, this ETF holds some of the cheapest quality stocks in the world with an average price-to-earnings ratio of 5.5 (vs. 12 for the MSCI Emerging Markets Index and about 20 for the S&P 500). And its average stock holding trades at only 1.2 times book value and yields 7.7% (versus 1.4% for the S&P 500).

To sum it up, the stocks in this ETF could more than triple in value and they would still be cheaper than the S&P 500. The fund, while down 16% so far this year, was up 11.7% in 2021 versus negative-2.5% for the MSCI Emerging Markets Index.

It does take a leap of faith to be a contrarian and buy assets like these that are out of favor and largely ignored. But that is how smart investors often earn higher returns with less risk.

Also keep in mind that blending emerging market stocks with U.S. stocks actually reduces your portfolio’s volatility since the two asset classes don’t move together. Emerging markets beat to their own drummer. In my opinion, emerging market equities are the world’s most undervalued asset class.

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