Podcasts & Videos

"Weighting" for Corporate Profits? A Discussion on Index Construction with WisdomTree and S&P

June 1, 2012
This podcast evaluates indexing in the U.S. equity markets with an industry leader Standard & Poor's which pioneered the market cap weighting approach and WisdomTree, an industry leader in earnings and dividend weighted index strategies. Topics discussed in this podcast include: how earnings screens are incorporated in both S&P and WisdomTree indexes, how indexes have performed versus active managers, and the current composition of the earnings stream and earnings growth.

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Data sources: Bloomberg, Standard&Poor's and Morningstar Direct.

You cannot invest directly in a index.

Market Capitalization: Number of shares outstanding multiplied by the price per share, and when utilized as a weighting methodology higher values typically receive greater index weights. Since share price is an input, as share prices rise constituents typically receive greater weights.

Earnings Weighted Strategy: Earnings per share multiplied by the number of shares outstanding, and when utilized as a weighting methodology higher values typically receive greater index weights. Weight is pushed towards firms with greater earnings as opposed to firms that have increased in price.
Dividend Weighted Strategy: Dividends per share multiplied by the number of shares outstanding, and when utilized as a weighting methodology higher values typically receive greater index weights. Weight is pushed towards firms with greater dividends as opposed to firms that have increased in price.

Active Managers: Typically refers to mutual fund portfolio managers who have full discretion over the assets that they manage within the frameworks defined by their respective prospectus filings.

Earnings Stream: Earnings per share multiplied by the number of shares outstanding, calculated for each constituent in an index. Each value is then added together to form an aggregate value for the index.

S&P Midcap 400 Index: capitalization-weighted index that measures the performance of the midcap range of the U.S. stock market, with stocks selected by the Standard & Poor's Index Committee.

S&P Smallcap 600 Index: capitalization-weighted index that measures the performance of the small-cap range of the U.S. stock market, with stocks selected by the Standard & Poor's index committee.

S&P 500 Index: Market 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.

Russell 1000 Index: The Russell 1000 Index is a measure of the 1,000 largest companies in the Russell 3000 Index.

Russell 2000 Index: The Russell 2000 Index is a measure of the 2,000 Smallest companies in the Russell 3000 Index.

Russell 3000 Index: The Russell 3000 Index measures the performance of the 3,000 largest U.S. companies based on total market capitalization.

Price to Earnings (P/E) Ratio: Share price divided by earnings per share. Lower values indicate that each respective dollar of earnings is accessible at a lower price, thought beneficial by investors who want to access equity earnings at relatively lower prices.

Price to Book Ratio: Share price divided by book value per share. Book value of equity is a balance sheet metric indicative of the value of a firm’s equity. Lower values indicate that each respective dollar of book value is accessible at a lower price, thought beneficial by investors who desire lower relative valuations.

Earnings to Price Ratio: Earnings per share divided by share price, sometimes termed the “earnings yield.” Higher values indicate that a firm is generating higher earnings per share relative to its price per share, thought to be a positive attribute for value-oriented investors who desire to initiate investments at relatively lower prices.

Sales to Price Ratio: Sales per share divided by share price. A higher value indicates that more sales are being generated relative to the price per share.

Standard Deviation: Frequently a measure of risk, and specifically the dispersion of a set of actual returns about an average return for a particular period. Higher numbers indicate a greater probability of being further away from the average return.

Margins: A measure of a firm’s profit-generating capability. Higher numbers indicate a firm has generated greater profits per unit of revenues.

Z-Score: Statistical method used primarily to standardize a data set. Values in the dataset are converted from their original values into standardized values, typically with the value of 0 indicating a neutral, expected value, or average and every one-unit interval (either positive or negative) indicating an observation 1-standard deviation removed from that average or neutral value. Higher z-scores indicate more extreme observations that are further removed from the average or neutral value of the dataset.

The bear market discussion refers to the specific methodologies of the mid and small cap earnings funds in the context of their ability to potentially beat active managers, both in terms of providing potential downside protection during the bear market as well as potentially capturing the recovery after the bear market.

2008 was a bear market. Looking at measures of equity performance in 2008, be it the S&P 500 Index, Russell 3000 Index—nearly any index that measures the performance of U.S. equities faced difficult conditions in 2008. On a relative basis, compared against their Morningstar universes (the mid blend universe for mid caps and the small blend universe for small caps), our mid cap and small cap earnings funds did well. It is important to note that they did not provide positive returns, but rather, they provided returns that outpaced approximately 70% of their peer groups. The source for this data is Morningstar Direct.

 

As of 5/22/2012    
  Apple Exxon
  AAPL XOM
WisdomTree Earnings Index 3.57% 4.11%
WisdomTree Earnings 500 Index 4.08% 4.70%
WisdomTree Midcap Earnings Index 0.00% 0.00%
WisdomTree Smallcap Earnings Index 0.00% 0.00%
WisdomTree Largecap Value Index 8.58% 11.16%
WisdomTree Largecap Growth Index 10.26% 13.33%
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Jeremy Schwartz, CFA
Global Head of Research
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Craig Lazzara
Senior Director U.S. Equities
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Bruce Lavine
President & Chief Operating Officer of WisdomTree
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