A Decade Of Out-Performance: Inside WisdomTree's Dividend-Weighted Strategies
A decade ago, WisdomTree changed passive investing with the introduction of a sweeping series of dividend-weighted indexes. WisdomTree Chief Investment Strategist Luciano Siracusano discusses our approach to dividends and how several WisdomTree strategies outperformed traditional beta benchmarks over the past 10 years. Watch
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Stock prices can—and do—deviate from their underlying value for many reasons. WisdomTree believes fundamentals like dividends or earnings offer more objective measures of a company’s health, value and profitability than stock price alone.
The majority of ETFs are market cap-weighted—meaning they give more weight to companies selling at higher prices than those offering stronger fundamentals. WisdomTree uses proprietary weighting methodologies designed to magnify the effect fundamentals - like dividends or earnings - have on risk and return characteristics.
Dividends and dividend stocks have historically outpaced inflation*, and offer the potential for income, income growth and capital appreciation. In our opinion, dividends can provide many benefits - regardless of the market direction. And weighting by the Dividend Stream® can magnify the effect dividends have on performance.**
*Source: WisdomTree U.S. Bureau of Labor, 2012, the S&P 500 12/31/1957 - 12/31/2012. **Dividend Stream is defined as the sum of the cash dividends of all the constituents within the index, which constituent weights determined by each firm’s proportionate contribution to this aggregate number. Payment of dividends does not remove market risk and the potential for principal loss; a company may discontinue or reduce payment of dividends at any time.
WisdomTree was the first investment manager to weight by the Dividend Stream. We do this to provide higher income and growth potential to investors. In the chart below, Professor Jeremy Siegel demonstrates the power of dividends by breaking the S&P 500 Index into dividend yield quintiles and tracking the growth of $1000 from December 31, 1957 to December 31, 2013. Not only did the stocks with the highest dividend yields more than triple the growth of the S&P over that time, they outperformed the stocks with the lowest dividend yields by nearly 600%.
You cannot invest directly in an index. Index performance does not represent actual fund or portfolio performance. A fund or portfolio may differ significantly from the securities included in the index. Index performance assumes reinvestment of dividends but does not reflect any management fees, transaction costs or other expenses that would be incurred by a portfolio or fund, or brokerage commissions on transactions in fund shares. Such fees, expenses and commissions could reduce returns. Past performance is not indicative of future results. Source: Siegel, Jeremy, Future for Investors (2005), With Updates to 2012 Each stock in S&P 500 Index is ranked from highest to lowest by dividend yield on December 31st of every year and placed into "quintiles," baskets of 100 stocks in each basket. The stocks in the quintiles are weighted by their market capitalization. The dividend yield is defined as each stock's annual dividends per share divided by its stock price as of December 31st of that year. The S&P 500 Index is a capitalization-weighted index of 500 stocks selected by the Standard & Poor's Index Committee designed to represent the performance of the leading industries in the United States economy.
In this hypothetical example, the dividend-weighted portfolio generates approximately 30% more dividend income and almost 1% of additional dividend yield than the market cap-weighted option. What's more—it did this using the same three stocks and the same initial investment.
1. Market capitalization is calculated by multiplying a company's shares outstanding by the current market price of one share.
Although earnings can provide an accurate picture of company profitability, in the quest for pure growth, we believe investors often pay too much for the "market." Weighting by the Earnings Stream* can reduce overall price-to-earnings (P/E) ratios**—in essence lowering the price of the market.
*Earnings Stream is defined as the sum of aggregate earnings generated by all companies in the index. **The price/earnings ratio is defined as each stock's net income per share divided by its stock price as of December 31st of that year. Lower values are generally thought of as a positive driver of future investment performance, as each dollar of earnings costs less on the basis of the share price; conversely, higher valuations are generally thought of as a negative driver of future investment performance. The use of an earnings-weighted strategy does not remove market risk and the potential for loss of principal.
WisdomTree weights by the Earnings Stream in order to magnify the effect earnings may have on performance. In the chart below, Professor Jeremy Siegel illustrates the importance of earnings by breaking the S&P 500 into quintiles based on price-to-earnings and tracking the growth of $1,000 from December 31, 1957 to December 31, 2013. Not only did the stocks with the lowest P/E ratios provide more than four times the growth of the S&P 500 over that time, they outperformed the stocks with the highest P/E ratios by more than 1200%.
You cannot invest directly in an index. Index performance does not represent actual fund or portfolio performance. A fund or portfolio may differ significantly from the securities included in the index. Index performance assumes reinvestment of dividends but does not reflect any management fees, transaction costs or other expenses that would be incurred by a portfolio or fund, or brokerage commissions on transactions in fund shares. Such fees, expenses and commissions could reduce returns.
Past performance is not indicative of future results. Source: Siegel, Jeremy, Future for Investors (2005), With Updates to 2012 Each stock in S&P 500 Index is ranked from lowest to highest by price to earnings ratio on December 31st of every year and placed into "quintiles," baskets of 100 stocks in each basket. The stocks in the quintiles are weighted by their market capitalization.
The S&P 500 Index is a capitalization-weighted index of 500 stocks selected by the Standard & Poor's Index Committee designed to represent the performance of the leading industries in the United States economy.
WisdomTree Earnings ETFs weight stocks by their Earnings Stream—defined as the sum of aggregate earnings generated by all companies in that index—rather than by market cap. The hypothetical example below compares earnings weighting to market cap weighting.
1. Market Capitalization is calculated by multiplying a company's shares outstanding by the current market price of one share.
International investing provides many exciting opportunities to investors. But these opportunities can come with additional risks—one of which is currency fluctuations. WisdomTree's Hedged Equity family of Funds enables investors to access the growth potential of numerous markets around the world while hedging1 out the risks and volatility of the corresponding currency.
1 Hedge: Apply strategies meant to mitigate the impact of currency movements on equity returns.
International investment returns are typically made up of two parts: equity returns and currency returns. Not only can currencies add volatility2, but in some cases currencies can also be a headwind for equity returns. Hedging currency can help investors:
BOOST RETURN POTENTIAL
Most currencies are positively correlated with their local equity markets, meaning they often move up and down together. Some markets, however, in export driven economies like Japan are negatively correlated, so equities tend to rise as the yen weakens. When this happens, the weakening yen drags down the equity returns. Hedging the yen can help investors more fully capture the pure equity returns, especially if one believes the yen is likely to weaken.
Sources: Bloomberg, WisdomTree. Past performance is not indicative of future results. You cannot invest directly in an index. The trailing-one year period was chosen to visually represent the most recent trend between the currency and equity markets.
Yen spot rate (vs. USD): Indicates the change in value of the yen in terms of U.S. dollars. Negative values indicate the yen has lost value relative to the U.S. dollar. WisdomTree Japan Hedged Equity Index: Designed to provide exposure to Japanese equity markets while at the same time neutralizing exposure to fluctuations of the Japanese yen movements relative to the U.S. dollar. MSCI Japan Index: A free-float adjusted market capitalization-weighted index designed to track the equity market performance of Japanese securities listed on the Tokyo Stock Exchange, Osaka Stock Exchange, JASDAQ and Nagoya Stock Exchange.
The WisdomTree Japan Hedged Equity Index and MSCI Japan Index were selected to contrast the difference in cumulative performance between an index that hedges any fluctuations in the value of the yen vs. the U.S. dollar and an index that includes those fluctuations within its performance calculations relative to the U.S. dollar.
REDUCE VOLATILITY
Currency can be a source of additional volatility on top of local equity market volatility, so hedging currency exposure can reduce the volatility associated with international investments. Consider that you might still want to benefit from the growth of leading European companies, but might want to avoid the volatility associated with the euro. Hedging the euro may enable you to do that.
Sources: MSCI, Zephyr StyleADVISOR. Past performance is not indicative of future results. You cannot invest directly in an index. *Equity: Volatility of the equity prices denominated in their local currency, in this case the euro. **Currency: Incremental volatility added to the local due to changes in the value of the euro relative to the U.S. dollar. ***Currency + Equity: Volatility of the combination of both the local equity prices denominated in local currency as well as that of the Euro relative to the U.S. dollar.
MSCI EMU Index: A free float-adjusted market capitalization-weighted index designed to measure the performance of the markets in the European Monetary Union.
Standard deviation: measure of how widely an investment or investment strategy's returns move relative to its average returns for an observed period. A higher value implies more "risk", in that there is more of a chance the actual return observed is farther away from the average return.
2 Volatility: A measure of the dispersion of actual returns around a particular average level. 3 Correlation: Statistical measure of how two sets of returns move in relation to each other. Correlation coefficients range from -1 to 1. A correlation of 1 means the two subjects of analysis move in lockstep with each other. A correlation of -1 means the two subjects of analysis have moved in exactly the opposite direction.
We take a simple, rules-based approach to hedging currency.
MECHANICS OF THE CURRENCY HEDGE
Local Market Equity Return + Currency Return - Hedged Currency Return = Hedged Equity Return
IMPLEMENTATION AND ADJUSTMENTS
The hedge is implemented with short positions in 1-month forward contracts2 versus the U.S. dollar with month-end adjustments to offset the currency exposure inherent in the purchase of international equities by U.S. investors.
COST OF CURRENCY HEDGE DRIVEN BY
2 Forward currency contracts: A forward contract in the forex market that locks in the price at which an entity can buy or sell a currency on a future date. 3 Refers to USD vs. EUR, JPY and GBP. 4 Liquidity: The degree to which an asset or security can be bought or sold in the market without affecting the asset's price. Liquidity is characterized by a high level of trading activity. Assets that can be easily bought or sold are known as liquid assets. 5 Currency: U.S. Dollar (USD), Japanese Yen (JPY), Euro (EUR), Pound (GBP). 6 Non-deliverable forward currency contract: An agreement to buy or sell a specific currency at a future date at an agreed-upon rate that is settled in U.S. dollars.
With such an increased focus on the global economy these days, investors are likely aware of how foreign currency movements can impact your international investments. But changes in the U.S. dollar can impact your domestic investments as well.
Consider that many U.S. companies generate a large portion of their revenue outside of the United States. For these companies, a strong dollar can hurt their competitiveness as their goods and services become more expensive to their international clients. By the same token, there are domestically-oriented companies that may perform better when the dollar is strong.
At WisdomTree, we understand that dollar movements can impact U.S. investors. We have developed the WisdomTree Strong and Weak Dollar U.S. Equity Indexes to define the universes of companies positioned to benefit from strong and weak dollar environments, respectively. There are two critical components we consider:
HOW THE WISDOMTREE STRONG & WEAK DOLLAR U.S. EQUITY INDEXES WORK
Source: WisdomTree. You cannot invest directly in an index.
1Correlation: Statistical measure of how two sets of returns move in relation to each other. Correlation coefficients range from -1 to 1. A correlation of 1 means the two subjects of analysis move in lockstep with each other. A correlation of -1 means the two subjects of analysis have moved in exactly the opposite direction.
S&P 500 Index:Market capitalization-weighted benchmark of 500 stocks selected by the Standard and Poor’s Index Committee designed to represent the performance of the leading industries in the United States economy.
U.S. Federal Reserve Trade-Weighted Dollar Index:Tracks the performance of the U.S. dollar against a basket of currencies representing the major trading partners of the United States. Currencies are weighted based on their relative importance to the trade of the United States.
WisdomTree Strong Dollar U.S. Equity Index:The WisdomTree Strong Dollar U.S. Equity Index measures the performance of U.S. based companies that derive more than 80% of their revenue from the United States. The Index is designed with a goal of minimizing exposure to companies with significant revenue from exports that are vulnerable to a strengthening U.S. dollar. The Index employs a modified market capitalization weighing process to tilt weights to companies that have a higher correlation to the U.S. dollar.
WisdomTree Weak Dollar U.S. Equity Index:measures the performance of U.S. based companies that derive less than 60% of their revenue from the United States. The Index is designed with a goal of maximizing exposure to companies with significant revenue from exports that may benefit from a weakening U.S. dollar. The Index employs a modified market capitalization weighing process to tilt weights to companies that have a lower correlation (more negative correlation) to the U.S. dollar.
The Global Industry Classification Standard (“GICS”) was developed by and is the exclusive property and a service mark of MSCI Inc. (“MSCI”) and Standard & Poor’s (“S&P”), a division of The McGraw-Hill Companies, Inc. and is licensed for use by WisdomTree Investments, Inc. Neither MSCI, S&P nor any other party involved in making or compiling the GICS or any GICS classifications makes any express or implied warranties or representations with respect to such standard or classification (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability and fitness for a particular purpose with respect to any such standard or classification. Without limiting any of the foregoing, in no event shall MSCI, S&P, any of their affiliates or any third party involved in making or compiling the GICS or any GICS classifications have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.
Typically, investors consider the S&P 500 as the “benchmark” for U.S. equities. So, how do these two Indexes compare to this important benchmark? Looking at the overweights and underweights provides an interesting comparison:
THE STRONG DOLLAR & WEAK DOLLAR SECTORS
Sources: Bloomberg, Factset, Standard & Poor’s. Data as of 6/30/2015. 1 Strong Dollar Tilts: Refers to Utilities, Financials, Consumer Discretionary and Telecommunication Services, where the WisdomTree Strong Dollar U.S. Equity Index exhibits an overweight relative to the S&P 500 Index. 2 Weak Dollar Tilts: Refers to Energy, Health Care, Information Technology, Industrials and Materials, where the WisdomTree Weak Dollar U.S. Equity Index exhibited overweights versus the S&P 500 Index. Energy was the exception, and is considered a weak dollar tilt because it is not included within the WisdomTree Strong Dollar U.S. Equity Index. Subject to change. You cannot invest directly in an index.
WisdomTree believes that investors should consider the benefits of diversifying their cash holdings on a global basis. Diversifying currency holdings offers investors the potential to earn higher yields while lowering the risk inherent to holding assets in only one currency.
Although these Funds invest in very short-term, investment grade instruments, the Funds are not "money market" funds and it is not the objective of the Funds to maintain a constant share price.
Diversification does not eliminate the risk of experiencing investment losses.
WisdomTree provides exposure to currencies within the ETF structure. WisdomTree Currency ETFs provide exposure to non-U.S. currencies and money market rates, while offering:
* Holdings are displayed daily on the website. ** Ordinary brokerage commissions apply.
The ETF structure offers a number of benefits to investors looking to invest in currencies:
How diversified are your fixed income holdings? If you're only holding U.S. fixed income instruments, such as bonds, the answer may be not enough. Through the dynamic combination of foreign interest rates and local currencies, WisdomTree's international fixed income ETFs offers investors income potential, diversification potential—and much more. In fact, they may enable you to obtain more complete asset allocation.
Diversification does not eliminate the risk of experiencing investment losses. See important risk information below.
WisdomTree takes a unique approach to fixed income investing. We look beyond market capitalization and the size of debts outstanding to consider fundamentals such as the capacity of countries and corporations to pay their debts. We combine the traditionally passive structure of ETFs with active risk management and security selection.
To manage key risks of liquidity, solvency and inflation, WisdomTree utilizes a disciplined active investment process focused on continuous risk management to unlock medium and long-term potential.
The ETF structure offers a number of benefits to investors looking to invest in fixed income:
WisdomTree believes alternative investments provide a smart way to achieve diversification and performance potential in almost any market. However, these types of strategies have traditionally only been available to institutional investors. Through WisdomTree, these sophisticated strategies are available to all investors—in the desirable ETF structure.
Diversification does not eliminate the risk of experiencing investment losses. Managed Futures are not suitable for all investors. Additionally, alternative strategies carry additional risks and are generally more volatile; please see important investor information below.
The markets of 2008 were enough to make even the most stalwart investor cringe. But a number of positives came out of them. One of the most crucial was that many investors became more aware of the critical importance of downside protection and true diversification. For many investors, traditional allocations, as it turned out, generally did not provide enough diversification. As the markets unwound, correlations between traditional asset classes increased. As a result, investors all over the world now recognize the need to diversify beyond traditional asset classes—and beyond traditional strategies.
Through ETFs, all investors can access the potential represented by alternative opportunities. Additionally, the ETF structure itself offers many benefits to investors:
1K-1 is a tax document used to report the income, losses and dividends of a business's partners or a corporation's shareholders. Rather than being a financial summary for the entire group, the schedule K-1 document is prepared for each partner or shareholder individually.
