WisdomTree Investments recently released earnings-based exchange-traded funds. This follows a pattern established by WisdomTree to market fundamentally-weighted ETFs which are unique and potentially valuable to a new generation of investors. Luciano Siracusano, director of research for WisdomTree, appeared on CNBC in late March to talk about the appeal of this unique product line. According to Siracusano, research has shown that creating indexes based on earnings and dividends can potentially increase dividend yields, lower P/E ratios, reduce overall volatility, and increase investment returns. Does this sound too good to be true? Visit the website or read up on Jeremy Siegel’s research which back-tests a multitude of corresponding data. You may also find this interview from Seeking Alpha with Siracusano interesting as well.
WisdomTree Investments launched 20 exchange-traded funds back in June of 2006. At the time, talks about product saturation within the ETF market were still fairly young and the WisdomTree launch was highly anticipated. At the time, it was the largest daily release of ETFs to enter the market. The common characteristic of the WisdomTree family is dividends. Each of the original 20 funds pays a dividend and the yields are fairly high compared with other equity-based ETFs. The fund family is also geared internationally with 14 non-US funds dominating the six US funds. Of the international funds, three track Europe, three track Japan, two track the broader Pacific and six are broad-based international funds.
This new line follows the trend away from market-cap indexes and into fundamentally-weighted indexes. Jeremy Siegel, the Senior Investment Strategy Advisor to Wisdom Tree commented on the original conference call about flaws in the market-cap structure. A market-capitalized index (based on the number of shares outstanding multiplied by the current stock price) assumes an efficient market where the stock price is fairly valued. We’ve recently seen fundamentally-weighted indexes outperforming market-cap indexes. This is because they give small-cap stocks a fair chance in the index rather than a miniscule weighting in the face of giant stocks such as Microsoft. We’ve all seen the small-cap indexes outperforming the large-cap indexes for the past five years, giving reason for investors to consider this new route.
Siegel also pointed out that reinvested dividends have, historically, been the primary driver of total return in US equity markets.
WisdomTree is not the first to base ETFs on fundamentally-weighted indexes. RAFI is one of the more popularly licensed indexes which strays from market-cap weightings and has outperformed the S&P 500 over the last 1, 3, and 5-year periods. PowerShares, which uses a structured-equity approach, has licensed the RAFI for a fund which they added to their already popular ETF line.
In terms of expenses Wisdom Tree plans on staying competitive with others fund families ranging from 28 to 58 basis points. As expected, the international funds will be more expensive than the domestic funds, but that is a natural consequence of offering exotic ETFs.
This new line of funds includes the first ever International Small-Cap Dividend Fund.
WisdomTree also has a “DIEFA” fund which follows the MSCI EAFE index. The advantage to DIEFA is that it currently boasts over a 4.5% dividend, substantially higher than the MSCI EAFE index.
I really like the WisdomTree ETF family for two reasons. The first, as pointed out by Jeremy Siegel and others, the market-cap approach is not necessarily the best approach to investing. It unfairly weights giant companies which don’t fundamentally deserve such a large weighting within the indexes. The second reason has to do with current demographics. As baby-boomers start retiring, portfolio managers will be allocating portfolios towards dividend and other income-oriented products such as those found in the WisdomTree ETF line. Combined with a tax-code which currently favors dividend investing, WisdomTree should remain fairly competitive in the ETF arena.
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*Equity-based ETFs are subject to risks similar to those of stocks. Investment returns will fluctuate and are subject to market volatility. Shares may be worth more or less than their original cost when sold. Investors cannot invest directly in an index. While exchange-traded funds track an index, they may not be an exactly replication of the index because of expenses and other factors.
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