ETF

Emerging markets small-cap “value” ETF launched today

WisdomTree’s Emerging Markets SmallCap Dividend ETF (ticker DGS) started trading today. This ETF, which tracks the WisdomTree Emerging Markets SmallCap Dividend Index, demonstrates a significant “value” tilt.

In my opinion, this ETF appears to be the closest thing to the “emerging market” “smallcap” and “value” asset class available currently to retail investors (I do not consider DFA funds to be easily available to retail investors). According to the fact sheet [PDF], this ETF has an expense ratio of 0.63%, which I think is quite reasonable considering the equity markets it is targetting.

2007-10-29-dgs.png

The top 10 countries, as of Oct 26, 2007, were

Taiwan 23.38%
South Africa 14.16%
Korea 12.36%
Thailand 11.11%
Malaysia 10.87%
Israel 9.05%
Turkey 4.20%
Mexico 2.83%
Indonesia 2.63%
Chile 2.60%

This ETF has a dividend yield of more than 4%. From my experience with the VWO ETF, a significant portion (say 40%) will probably be considered as not “qualified” for the lower dividend tax rate by the IRS. As such, this fund will not be very tax efficient in held in a taxable account.

At the time of this post, this ETF is trading with a spread of four cents, with the asking price at $51.62 and bidding price of $51.58. Taking the NAV to be $51.60, the “spread cost” is a very reasonable 0.02/51.6 = 0.039%.

The figure below shows this morning’s trading action (up until the time of this post):

2007-10-30-dgs-trades.png

I will be watching this ETF closely to see if it fits into my existing portfolio.

The related Bogleheads discussion can be found HERE.

Sogoinvest did not classify qualified dividends

Last year, I invested in a few ETFs using Sogoinvest and these ETFs had some income dividends distributions.

After I received the 1099DIV form from Sogoinvest, I noticed that all the dividends are classified as ordinary dividends, none of them are classified as qualified dividends. Also, for my VWO (Vanguard Emerging Market ETF) holding, the foreign taxes paid are not declared in the 1099DIV form. I know these are incorrect because the same ETF holdings held at Ameritrade had qualified dividends and foreign taxes paid declared in the 1099DIV form.

These incorrect figures are not good for me or investors in general because the tax rate for a qualified dividend distribution is typically only 15%, whereas the tax rate for an unqualified dividend can run as high as 35%. In addition, any foreign taxes paid by the fund can be claimed back as a credit in the tax return, dollar-for-dollar.

I requested Sogoinvest through their secure message system to issue me an updated 1099DIV. Here’s their “canned” reply:

We will look into this, the 1099 statements reflect what the IRS gave to us. So we will look into this and get it corrected if it needs to be as soon as possible.

Huh? I thought it is Sogoinvest who reports the dividend information to the IRS instead of the other way round? Anyway, I did not try to argue with them on this point.

I was not hopeful that I would get an updated 1099DIV on time, but there is nothing much I could do but to wait for an update. I also sent them a reminder some time after my original request. Then came April 14, but nothing. In the end, I filed my taxes without an updated 1099DIV, paying more in taxes than I actually need to. By my estimate, I probably paid about $50 more in taxes because of the inaccuracies in the 1099DIV form generated by Sogoinvest.

I do not know if this is an isolated case of an incorrect 1099DIV form, but if the qualified dividends and foreign taxes paid are generally not reported by Sogoinvest, then it will be a very big turn-off indeed.

Related links [1] [2] [3].