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Growth Beats Value, but Dividends Outperform

Christopher Gannatti, CFA, Head of Research, Europe

There has been much discussion of late about factor investing. Now, it’s important to recognize that this is not a new discussion—Professors Eugene Fama and Kenneth French wrote a seminal work on the subject all the way back in the early 1990s.1   WisdomTree Reaches 10 Years of History with Its First Indexes Our initial U.S. dividend Indexes have now been around for more than 10 years, calculated in real time. Ten years is a period of focus when judging the efficacy of investment strategies. This 10-year period has led to a stunning result: In a period where the growth style outperformed the value style, WisdomTree’s dividend Indexes tended to keep close pace or in some cases outperform core, market capitalization-weighted benchmarks. • Broad Market: For its first 10 years, the WisdomTree Dividend Index delivered a 7.45% average annual return, 6 basis points ahead of the Russell 3000 Index. The Russell 3000 Growth Index returned 8.65% per year, whereas the Russell 3000 Value Index returned 6.03% per year.   • Large Cap: Over the same period, the WisdomTree LargeCap Dividend Index returned 7.14% per year, while the S&P 500 Index returned 7.41%. The Russell 1000 Value Index was up 6.11%, whereas the Russell 1000 Growth Index was up 8.78% per year.   • Mid-Cap: In the mid-cap size segment, the WisdomTree MidCap Dividend Index was up 8.92% per year. This was ahead of the S&P MidCap 400, Russell MidCap Value and Russell Midcap Growth indexes.   • Small Cap: The WisdomTree SmallCap Dividend Index was up 7.00% per year, beating the Russell 2000 Index and the Russell 2000 Value Index and only trailing the Russell 2000 Growth Index by 20 basis points per year during a period of significant outperformance for the growth style.   Bottom line: Within the broad-market, mid-cap and small-cap size segments, the WisdomTree U.S. Dividend Indexes beat the relevant core and value benchmarks over the past 10 years. Across all size segments, growth outperformed value. What might these Indexes be tapping into, if not solely value?   Dividends: More Sensitive to Value and Operating Profitability Sensitive to Value Sensitive to ProfitabilityDividend Strategies Tilt toward Value: This point is congruent with intuition, as in the United States equity markets many growth companies—especially in mid- and small caps—do not pay regular cash dividends. The WisdomTree SmallCap and MidCap Dividend Indexes were clearly two of the strategies most heavily tilted toward value over this period.   • Dividend Strategies Tilt toward Operating Profitability: What’s more interesting is that over the same period, the WisdomTree Dividend Indexes shown all tilted more toward operating profitability than all of the other market capitalization-weighted benchmarks shown. This is a remarkable result, in our opinion, in that it clearly shows that, over this period, focusing on dividends and rebalancing back toward the Dividend Stream® in a disciplined manner did more than simply capture sensitivity to value.   Our Dividend Strategies Captured More Than Just Value Sensitivity We wrote in a prior blog post that “value” was not a great tilt to have over the most recent rolling 10-year period, delivering some of its worst performance seen compared to stocks tilted in the opposite direction, having much lower book-to-market value ratios. Knowing that, it makes the live performance record of the WisdomTree strategies all the more remarkable for these first 10 years of history.         1Eugene F. Fama & Kenneth R. French, “The Cross-Section of Expected Stock Returns,” The Journal of Finance, Volume XLVII, No. 2, June 1992.

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Dividends, Equity

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