WisdomTree

Equity, Quality Dividend Growth

Introducing New Global Index Methodologies

by Jeremy Schwartz, Director of Research on December 7, 2015

Each year, we monitor the global Dividend Stream® for growth so that we can refresh the weights of the underlying constituent companies in various WisdomTree Indexes.
 
• The global Dividend Stream of the WisdomTree Global Dividend Index (“Global Dividend Index”) saw growth over the period of 7.2% on a local basis, but fell 1.5% on a dollar basis. The primary drivers of this growth were U.S. constituents, growing their dividends almost 8% compared with the 2014 Index screening. Global ex-U.S. markets grew their dividends approximately 7% in local terms, but their dividends dropped 6% in dollar terms due to currency depreciation.
• In terms of share of the global Dividend Stream, the U.S. has been on a strong upward trend since the 2011 Index screening, when its constituents made up only about one-quarter of the global Dividend Stream. As of the 2015 Index screening, U.S. constituents had increased their share to more than 36%, at the expense of both developed international and emerging market dividend payers.
• A review of criteria outlining what Chinese companies were included resulted in Chinese companies being added to the emerging market universe—some from the developed market WisdomTree universe and some newly added companies. We estimate about 1.4% of the developed world’s Dividend Stream was reclassified to emerging markets and 0.9% was from the addition of new companies. Stay tuned for a future blog post, in which we will go into more detail around this point.
 
Dividend Stream Growth across All Three Regions Shown, but Only U.S. Increases Share
Dividend Stream Growth
WisdomTree Global Dividend Indexes

This year, we incorporated a new global Index methodology covering three Indexes—Global High Dividend, Global SmallCap Dividend and Global Quality Dividend Growth—which aims to provide more diversified regional exposures. This is accomplished by two methods:
 
1. Regional Stock Selection: Our prior methodology would take the entire global universe and apply a factor selection methodology from the entire universe. When focusing on stock selection by dividend yield, the U.S. tended to have below-average yields and so would get under-weighted more dramatically in a yield-based selection methodology. By selecting either a quality factor or yield factor within three regions (the U.S., developed world and emerging markets), we are helping to neutralize the regional biases of certain markets having below-average yield or quality variables and thus providing more of a bias in the strategy. The WisdomTree Global High Dividend Index selects the top 30% of stocks with the highest dividend yields from each region, while the WisdomTree Global Quality Dividend Growth Index selects the 300 stocks with the best quality and growth ranking from each region, resulting in 900 total stocks.
 
The small-cap Index does not have a regional stock selection and just takes the 1,000 largest stocks from the bottom 5% of the total global market capitalization of the WisdomTree Global Dividend Index.
 
2. Capping Regional Exposures: Further, to make the global Indexes more about the specific factors for those regions instead of implying a relative over-weight to foreign markets because of their above-average dividend yields compared to the U.S., we have capped regional exposures to their market cap-weighted representative size.

The new methodology ensures that regional exposures resulting from dividend weighting are not dramatically under-weight U.S. and results in more pure factor exposures to global high dividends, quality dividend growth and global small caps.
 
Index Valuation Statistics
Index Valuation Statistics

For definitions of terms in the chart, visit our glossary.
 
Fundamental Weighting Tilts Toward Factors: We believe screening and weighting by different fundamentals can provide access to different factors:
 
Value: The WisdomTree Global High Dividend Index screens by dividend yield and then weights by dividends, typically resulting in a deep value exposure. The Index provides a dividend yield advantage of more than 237 basis points (bps) and sells at an 11.3% discount on a price-to-earnings (P/E) ratio basis, compared to the MSCI ACWI Index, as of September 30, 2015.
Quality: The WisdomTree Global Quality Dividend Index screens by growth and quality and then weights by dividends, providing access to quality with sensitivity to valuation. The Index had a return-on-equity (ROE) and return-on-assets (ROA) advantage of 6.7% and 3.9%, respectively, compared to the MSCI ACWI Index. The Index also had a growth advantage of more than 2% and lower leverage compared to the MSCI ACWI Index.
Small-Cap Value: The WisdomTree Global SmallCap Dividend Index screens by size and then weights by dividends, thereby focusing on small-cap value. The Index provides a dividend yield advantage of more than 207 bps and sells at a 16.7% discount on a P/E ratio basis, compared to MSCI ACWI Small Cap Index.

Important Risks Related to this Article

Dividends are not guaranteed, and a company currently paying dividends may cease paying dividends at any time.

Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty. 

Click to see more articles from this category