At WisdomTree, we believe strongly in relative value rebalancing. The act of rebalancing constituents of an index back to their fundamental values is important, given our belief that stocks often overshoot their underlying fundamentals.
We’ve seen in prior blog posts how two of our Indexes, WisdomTree MidCap Earnings Index (WTMEI) and WisdomTree SmallCap Earnings Index (WTSEI) have trimmed weight from some of their top-performing constituents and reallocated it to firms that did not perform as well. What we haven’t quite done as of yet is magnify the valuation impact of this rebalance.
Investors know that small caps may respond more quickly to positive changes in economic growth expectations or that long-established large-cap blue chips are a good choice to potentially mitigate portfolio volatility. But what about mid-caps—do they deserve special consideration in portfolio allocations?
Due to the futility of trying to time market tops and bottoms for individual stocks on a consistent basis, we believe that there are benefits to undertaking disciplined practices that take some weight away from particularly well-performing positions and reallocating toward areas that may not have kept up.
After such a strong year in U.S. equities, there may be benefits to shifting weight away from some of the top-performing companies most responsible for these results and toward those that might have been underappreciated by the market despite growing their earnings.