Image Source: Pixabay

The big rotation into cyclicals earlier this year highlighted one of the bigger opportunities in the markets today — emerging markets, asserts David Dierking, exchange-traded fund expert and editor of The Street's ETF Focus.

Dirt cheap valuations and high forecasted growth rates are making emerging markets one of the better choices for investors in 2022. If you can stomach some of the extra volatility, the trend of consecutive years of underperformance relative to the S&P 500 could be poised to reverse and deliver big gains to opportunists.

The WisdomTree Emerging Markets High Dividend ETF (DEM) is one I've followed closely for years. The fund's index starts by looking at emerging markets dividend payers and then ranks them by dividend yield.

Securities ranking in the highest 30% by dividend yield are selected for inclusion with components getting weighted based on annual cash dividends paid. It's a pretty straightforward strategy. The "aggregate cash dividends paid" feature helps the ETF focus on yield while tilting towards large-cap stocks.

The major attraction here is yield and valuation. The fund quotes a 5.6% trailing 12-month dividend yield, but the 30-day SEC yield, which is more forward-looking, is currently around 6.5%. If you exclude the period during the COVID-19 bear market where yields were abnormally high due to the 30%+ correction in equity prices, that yield is the highest it's been in at least six years.

On the downside, DEM only pays dividends quarterly and, like many international equity ETFs, those payments may fluctuate significantly on a quarterly basis. The fund paid $0.99 per share in Q3 2021, but paid just $0.17 two quarters earlier. If you're looking for steady and predictable income, this may not be the fund for you. If you're looking strictly for a high yield, DEM is worth a look.

Valuation is clearly the other attractive feature. As it stands today, DEM is trading at just 6 times forward earnings expectations and has a price/sales ratio of less than 1. That's about 30% below the 5-year average P/E ratio of around 9. Price/sales is about on par with its longer-term average, but price/book is discounted by about 10%.

If global central banks can manage to balance interest rates, inflation rates and GDP growth, conditions could favor value and cyclicals (60% of DEM's portfolio is invested in the combination of materials, financials, and energy stocks). If that happens, there's no reason to think that emerging markets couldn't rally and outperform U.S. stocks for an extended period of time.