WisdomTree ETF Bloghttps://www.wisdomtree.com/investments/blogen{6C517DBA-3F44-4D49-AD8F-BD2CD16E652A}https://www.wisdomtree.com/investments/blog/2024/03/15/with-nvidia-at-$2-trillion-where-is-the-risk-concentratedArtificial IntelligenceMegatrendsWith Nvidia at $2 Trillion, Where Is the Risk Concentrated?No stock has been hotter in this artificial intelligence (AI) cycle than Nvidia, which recently eclipsed a market capitalization of $2 trillion. Wheth&#8230;Fri, 15 Mar 2024 09:00:00 ZChristopher Gannatti, CFA<![CDATA[<p>No stock has been hotter in this <a href="/blog/glossary#artificial-intelligence">artificial intelligence (AI)</a> cycle than Nvidia, which recently eclipsed a <a href="/blog/glossary#market-capitalization">market capitalization</a> of $2 trillion.</p> <p>Whether it can continue at this pace is a much more difficult question. We scoured a universe of thematic equity exchange-traded funds (ETFs) listed in the U.S. market and found a number with more than 10% exposure to this single name.<a href="#_ftn1" name="_ftnref1"></a><sup>1</sup></p> <p>If you’re evaluating these ETFs, which tend to be theme-based, there may be some options for exposure to those themes with more diversification.</p> <p><strong>Three Strategies with Weight of 10% or More in Nvidia</strong></p> <p>We found three strategies with greater than 10% weight to Nvidia as of March 1, 2024:</p> <ul> <li>The <a rel="noopener noreferrer" href="https://www.vaneck.com/us/en/investments/semiconductor-etf-smh/overview/" target="_blank">VanEck Semiconductor ETF (SMH)</a> is a strategy that seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the MVIS US Listed Semiconductor 25 Index, which is intended to track the overall performance of companies involved in semiconductor production and equipment.</li> <li>The <a rel="noopener noreferrer" href="https://www.ishares.com/us/products/239705/ishares-phlx-semiconductor-etf" target="_blank">iShares Semiconductor ETF (SOXX)</a> seeks to track the investment results of the NYSE Semiconductor Index, which is composed of U.S.-listed equities in the semiconductor sector.</li> <li>The <a rel="noopener noreferrer" href="https://www.globalxetfs.com/funds/botz/" target="_blank">Global X Robotics & Artificial Intelligence ETF (BOTZ)</a> seeks to invest in companies that potentially stand to benefit from increased adoption and utilization of robotics and AI, including those involved with industrial robotics and automation, non-industrial robots and autonomous vehicles. The ETF seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Indxx Global Robotics & Artificial Intelligence Thematic Index.</li> </ul> <p>We compare these strategies—associated with AI as a catalyst—to the <a target="_blank" href="https://www.wisdomtree.com/investments/etfs/megatrends/wtai">WisdomTree Artificial Intelligence and Innovation Fund (WTAI)</a>. </p> <p><a target="_blank" href="https://www.wisdomtree.com/investments/etfs/megatrends/wtai" style="color: #37bac0;">WTAI</a> is tracking an index designed to consider a more full-ecosystem exposure to AI as opposed to concentrating on a specific area. Sometimes the market’s performance will favor concentrating on a particular position, like Nvidia, and sometimes it favors diversifying more broadly.</p> <p>Figure 1 provides, by showing the top 10 positions in each fund, a sense of the concentration in the single Nvidia position as well as within the overall top 10.</p> <p>A higher figure indicates that more of the overall strategy performance is being driven by the names seen in this figure as opposed to the rest of the strategy’s holdings.</p> <p><strong>Figure 1: Comparison of Top 10 Holdings</strong></p> <p> <img alt="" src="https://www.wisdomtree.com/investments/-/media/us-media-files/blog/blog-images-2/2024/march/with-nvidia-at-2-trillion-where-is-the-risk-concentrated/figure-1.jpg" style="height:344px; width:800px;" /></p> <p><strong><em>For current WTAI Fund holdings, please click <a target="_blank" href="https://www.wisdomtree.com/investments/etfs/megatrends/wtai" style="color: #37bac0;">here</a>. Holdings are subject to risk and change.</em></strong></p> <p><strong>Quantifying the Performance Wave</strong></p> <p>Nvidia’s share price after the launch of ChatGPT in November 2022 has been historic. Investors that we speak to are often nervous because they are simply not sure how long it can continue, particularly if they are initiating positions at present in 2024. We all recognize that a stock with a $2 trillion market capitalization can drop by 25% and still be worth $1.5 trillion—a very big number.</p> <p><a target="_blank" href="https://www.wisdomtree.com/investments/etfs/megatrends/wtai" style="color: #37bac0;">WTAI</a>, SMH, SOXX and BOTZ all had different exposures to Nvidia in figure 1—figures 2a, b and c showcase differences in performance across these four strategies.</p> <ul> <li>In figure 2a, we see the standardized performance as of year-end 2023, where it is clear that SMH and SOXX had the stronger returns in 2023, at least relative to <a target="_blank" href="https://www.wisdomtree.com/investments/etfs/megatrends/wtai" style="color: #37bac0;">WTAI</a> and BOTZ. Recall that SMH and SOXX can be thought of as “<a href="/blog/glossary#semiconductor">semiconductors</a>,” whereas WTAI and BOTZ—in their own distinct ways—are seeking to be “broader AI.”</li> <li>In figure 2b, we see that <a target="_blank" href="https://www.wisdomtree.com/investments/etfs/megatrends/wtai" style="color: #37bac0;">WTAI</a> and BOTZ had a downdraft from roughly the end of June 2023 through the end of October 2023, and it was this downturn that was the primary driver of their underperformance relative to SMH and SOXX. All four of the strategies rallied during November and December 2023.</li> <li>In figure 2c, we can see that the reign of Nvidia continued, and it continued to be better to simply focus on semiconductors as opposed to broader AI, at least if we are using performance to judge the result. SMH had the biggest exposure to Nvidia and it did the best. It is notable that BOTZ had the second-biggest exposure to Nvidia, but due to the broader exposure across robotics it was pulled down below the return of SOXX over this period, roughly the first two months of 2024. <a target="_blank" href="https://www.wisdomtree.com/investments/etfs/megatrends/wtai" style="color: #37bac0;">WTAI</a>, with the broadest focus of the four funds, lagged.</li> </ul> <p><strong>Figure 2a: Standardized Returns</strong></p> <p> <img alt="" src="https://www.wisdomtree.com/investments/-/media/us-media-files/blog/blog-images-2/2024/march/with-nvidia-at-2-trillion-where-is-the-risk-concentrated/figure-2a.jpg" style="height:380px; width:800px;" /></p> <p><strong><em>For the most recent month-end and standardized performance and to download the respective Fund prospectuses, click the relevant ticker: </em></strong><a href="https://www.wisdomtree.com/investments/etfs/megatrends/wtai"><strong><em></em></strong></a><strong><em><a target="_blank" href="https://www.wisdomtree.com/investments/etfs/megatrends/wtai" style="color: #37bac0;">WTAI</a></em></strong><strong><em>, </em></strong><a rel="noopener noreferrer" href="https://www.vaneck.com/us/en/investments/semiconductor-etf-smh/overview/" target="_blank"><strong><em>SMH</em></strong></a><strong><em>, </em></strong><a rel="noopener noreferrer" href="https://www.ishares.com/us/products/239705/ishares-phlx-semiconductor-etf" target="_blank"><strong><em>SOXX</em></strong></a><strong><em> and </em></strong><a rel="noopener noreferrer" href="https://www.globalxetfs.com/funds/botz/" target="_blank"><strong><em>BOTZ</em></strong></a><strong><em>.</em></strong></p> <p><strong>Figure 2b: The 2023 Year (12/31/22–12/31/23)</strong></p> <p> <img alt="" src="https://www.wisdomtree.com/investments/-/media/us-media-files/blog/blog-images-2/2024/march/with-nvidia-at-2-trillion-where-is-the-risk-concentrated/figure-2b.jpg" style="height:506px; width:768px;" /></p> <p><strong><em>For the most recent month-end and standardized performance and to download the respective Fund prospectuses, click the relevant ticker: </em></strong><a href="https://www.wisdomtree.com/investments/etfs/megatrends/wtai"><strong><em></em></strong></a><strong><em><a target="_blank" href="https://www.wisdomtree.com/investments/etfs/megatrends/wtai" style="color: #37bac0;">WTAI</a></em></strong><strong><em>, </em></strong><a rel="noopener noreferrer" href="https://www.vaneck.com/us/en/investments/semiconductor-etf-smh/overview/" target="_blank"><strong><em>SMH</em></strong></a><strong><em>, </em></strong><a rel="noopener noreferrer" href="https://www.ishares.com/us/products/239705/ishares-phlx-semiconductor-etf" target="_blank"><strong><em>SOXX</em></strong></a><strong><em> and </em></strong><a rel="noopener noreferrer" href="https://www.globalxetfs.com/funds/botz/" target="_blank"><strong><em>BOTZ</em></strong></a><strong><em>.</em></strong></p> <p><strong>Figure 2c: The First Two Months of 2024 (12/31/23–3/1/24)</strong></p> <p> <img alt="" src="https://www.wisdomtree.com/investments/-/media/us-media-files/blog/blog-images-2/2024/march/with-nvidia-at-2-trillion-where-is-the-risk-concentrated/figure-2c.jpg" style="height:506px; width:768px;" /></p> <p><strong><em>For the most recent month-end and standardized performance and to download the respective Fund prospectuses, click the relevant ticker: </em></strong><a href="https://www.wisdomtree.com/investments/etfs/megatrends/wtai"><strong><em></em></strong></a><strong><em><a href="https://www.wisdomtree.com/investments/etfs/megatrends/wtai"><strong><em></em></strong></a><strong><em><a target="_blank" href="https://www.wisdomtree.com/investments/etfs/megatrends/wtai" style="color: #37bac0;">WTAI</a></em></strong><strong><em>, </em></strong><a rel="noopener noreferrer" href="https://www.vaneck.com/us/en/investments/semiconductor-etf-smh/overview/" target="_blank"><strong><em>SMH</em></strong></a><strong><em>, </em></strong><a rel="noopener noreferrer" href="https://www.ishares.com/us/products/239705/ishares-phlx-semiconductor-etf" target="_blank"><strong><em>SOXX</em></strong></a><strong><em> and </em></strong><a rel="noopener noreferrer" href="https://www.globalxetfs.com/funds/botz/" target="_blank"><strong><em>BOTZ</em></strong></a><strong><em>.</em></strong></em></strong></p> <p><strong>Conclusion: $2 Trillion Is a Rather Big Number for a Firm’s Market Capitalization</strong></p> <p>While we can agree there is not necessarily an upper limit that defines how big any firm can be by way of market capitalization, execution takes time. Even if Nvidia’s revenues and profits march upwards, the share price incorporates a mix of those fundamentals alongside the hopes and dreams and aspirations of the broader crowd.</p> <p>Those aspirations and ultimately expectations can get ahead of reality, and it’s possible the share price will have to pause and let the execution and fundamentals catch up. The environment of the continual upward adjustments to the size of the AI accelerator chip market will eventually change, and the growth will eventually slow.</p> <p>We remind investors that AI, the theme, has been marching forward for decades, even if the combination of social media and smartphones put the headlines into the palms of our hands every minute of every day today, and the advent of processing power and cheap data storage allow for greater and greater breakthroughs.</p> <p>If you cannot predict where the hype might go next, we advocate a more holistic, broad ecosystem approach, like <a href="https://www.wisdomtree.com/investments/etfs/megatrends/wtai"><strong><em></em></strong></a><a target="_blank" href="https://www.wisdomtree.com/investments/etfs/megatrends/wtai" style="color: #37bac0;">WTAI</a>, such that there is a greater chance of capturing that next big AI topic.</p> <p><strong>Figure 3: Important Further Information about the Funds Mentioned</strong></p> <p> <img alt="" src="https://www.wisdomtree.com/investments/-/media/us-media-files/blog/blog-images-2/2024/march/with-nvidia-at-2-trillion-where-is-the-risk-concentrated/figure--3.jpg" style="height:478px; width:800px;" /></p> <p>If you are interested in diving more into the comparison of these Funds, please check out our <a rel="noopener noreferrer" href="https://www.wisdomtree.com/investments/tools#&#"" target="_blank">Fund Comparison Tool</a>.</p> <p> </p> <p> </p> <p><sup>1</sup> Source: WisdomTree’s thematic universe is a monthly report available <a rel="noopener noreferrer" href="https://www.wisdomtree.com/investments/-/media/us-media-files/documents/resource-library/wisdomtree-us-thematic-update.pdf" target="_blank">here</a> that includes measures of all U.S. listed thematic equity funds.</p><p style="font-family:Verdana; font-size:12px; font-weight:bold">Important Risks Related to this Article</p><p>For current Fund holdings, please click <a target="_blank" href="https://www.wisdomtree.com/investments/etfs/megatrends/wtai">here</a>. Holdings are subject to risk and change.</p> <p>There are risks associated with investing, including the possible loss of principal. The Fund invests in companies primarily involved in the investment theme of artificial intelligence (AI) and innovation. Companies engaged in AI typically face intense competition and potentially rapid product obsolescence. These companies are also heavily dependent on intellectual property rights and may be adversely affected by loss or impairment of those rights. Additionally, AI companies typically invest significant amounts of spending on research and development, and there is no guarantee that the products or services produced by these companies will be successful. Companies that are capitalizing on innovation and developing technologies to displace older technologies or create new markets may not be successful. The Fund invests in the securities included in, or representative of, its Index regardless of their investment merit and the Fund does not attempt to outperform its Index or take defensive positions in declining markets. The composition of the Index is governed by an Index Committee and the Index may not perform as intended. Please read the Fund&rsquo;s prospectus for specific details regarding the Fund&rsquo;s risk profile.</p>]]>{CC523105-AFF4-4B53-ABDB-E5DA69208676}https://www.wisdomtree.com/investments/blog/2024/03/15/rising-titans-the-allure-of-emerging-market-corporatesFixed IncomeEmerging MarketsRising Titans: The Allure of Emerging Market CorporatesIn 2023, a dominant theme for markets was the return of income in fixed income. Fast-forward to 2024, and despite a significant rally in spreads and a&#8230;Fri, 15 Mar 2024 08:30:00 ZBehnood Noei, CFA<![CDATA[<p>In 2023, a dominant theme for markets was the return of income in fixed income. Fast-forward to 2024, and despite a significant rally in spreads and a fall in yields during the fourth quarter, we believe this theme is still alive and well. As a matter of fact, yields of U.S. high-yield and investment-grade corporates still rest in the top quintile and decile of levels experienced over the last 10 years. </p> <p>However, one segment of the market that has gone under the radar has been <a href="/blog/glossary#emerging-market">emerging markets</a> debt, specifically emerging market corporates. In this piece, we will look at this sector and examine the case for including emerging market corporates’ debt in investors’ portfolios relative to U.S. corporate bonds and the dollar-denominated debt of emerging market sovereigns. </p> <p><strong>Attractive Yield Potential</strong></p> <p>Even after a significant rally of 444 <a href="/blog/glossary#basis-point">basis points (bps)</a> in spreads from the highs during COVID-19 (653 bps in March 2020), emerging market corporates continue to offer an attractive all-in yield. In fact, the all-in yield of 6.58% at the end of February stands in the top 10th percentile of yield offered by the sector in the past 10 years.</p> <p><strong>Emerging Market Corporates</strong></p> <p> <img alt="" src="https://www.wisdomtree.com/investments/-/media/us-media-files/blog/blog-images-2/2024/march/rising-titans-the-allure-of-emerging-market-corporates/figure-1.jpg" style="height:418px; width:738px;" /></p> <p><em>For definitions of terms in the chart above, please visit the <a target="_blank" href="https://www.wisdomtree.com/investments/glossary">glossary</a>.</em></p> <p> Emerging market corporates not only offer a higher yield compared to what they have offered in the past but also compared to a portfolio of their U.S. counterparts with similar <a href="/blog/glossary#credit-rating">credit ratings</a> (represented by the weighted average of the <a href="/blog/glossary BofAML US Corporate Index(C0A0)#ICE">ICE corporate index</a> and <a href="/blog/glossary BofAML US High Yield Index (H0A0)#ICE">ICE HY index</a>, weighted to the investment-grade/high-yield breakdown in the <a href="/blog/glossary# BofA Merrill Lynch US Emerging Markets Liquid Corporate Plus Index (EMCL)## ">EMCL Index</a>) (69% investment-grade and 31% high-yield as of February 29, 2024), they have consistently provided investors with higher income. </p> <p><strong>YTW</strong></p> <p> <img alt="" src="https://www.wisdomtree.com/investments/-/media/us-media-files/blog/blog-images-2/2024/march/rising-titans-the-allure-of-emerging-market-corporates/figure-2.jpg" style="height:406px; width:742px;" /></p> <p><strong>Strong Fundamentals</strong></p> <p>One of the biggest concerns with emerging market securities, specifically corporates, and the main reason they have consistently offered higher income compared to a portfolio of U.S. corporates with a similar credit rating mixture, is their fundamentals. However, by looking under the hood, one can see emerging market corporates have improved their fundamentals. The gross and net leverage in EM corporates are some of the lowest in the past decade and also lower relative to U.S. corporates. The same can be said about their <a href="/blog/glossary#coverage-ratio">interest coverage ratio</a>. Even though their IC has fallen recently, they still fare better than U.S. corporates.</p> <p> <img alt="" src="https://www.wisdomtree.com/investments/-/media/us-media-files/blog/blog-images-2/2024/march/rising-titans-the-allure-of-emerging-market-corporates/figure-3.jpg" style="height:287px; width:740px;" /></p> <p><strong>Better Credit Quality and Less Interest Rate Risk Than EM USD Sovereigns</strong></p> <p>Another frequently used jibe at emerging market corporates is if an investor wants to invest in emerging markets, they can invest in “higher quality, less risky” sovereigns. However, this is another misnomer about emerging market corporates issuing in USD. The USD-Denominated Emerging Market Corporate Index has a higher allocation to investment-grade issuers than to USD-denominated EM sovereigns. </p> <p><strong></strong><strong>Credit Quality of ICE Emerging Market Debt Indexes – USD Corporate vs. USD Sovereign</strong></p> <p><img alt="" src="https://www.wisdomtree.com/investments/-/media/us-media-files/blog/blog-images-2/2024/march/rising-titans-the-allure-of-emerging-market-corporates/figure-4.jpg" style="height:236px; width:667px;" /></p> <p>Looking at the country of risk of the issuers in these two indexes, the EM Corporate Index has a much higher allocation to countries with better fundamentals and a lower allocation to countries with struggling economic conditions. In many cases, the governments of the more developed emerging market countries secure most of their financing through debt denominated in their own currency.</p> <p><img alt="" src="https://www.wisdomtree.com/investments/-/media/us-media-files/blog/blog-images-2/2024/march/rising-titans-the-allure-of-emerging-market-corporates/figure-5-1.jpg" style="height:418px; width:724px;" /></p> <p> </p> <p>Finally, many emerging market corporations largely issue intermediate maturity debt, while EM sovereigns issue further out the curve, resulting in a consistently sharp duration difference between the two universes. (Currently, the universe for EM corporates has an average duration of 5.21 versus 6.98 for the universe of EM USD sovereigns.) Despite the duration difference, the aggregate yield sacrifice offered by EM corporates to EM is relatively modest, averaging about 27 bps over the last 10 years. Consequently, EM corporate portfolios have a significantly higher potential yield, given the amount of interest rate risk or yield per unit of duration, than EM USD sovereigns, as defined by their broad benchmarks.</p> <p><strong>Yield Per Unit of Duration</strong></p> <p> <img alt="" src="https://www.wisdomtree.com/investments/-/media/us-media-files/blog/blog-images-2/2024/march/rising-titans-the-allure-of-emerging-market-corporates/figure-6.jpg" style="height:411px; width:769px;" /></p> <p><strong>Selection Is the Key</strong></p> <p>As mentioned before, EM corporate fundamentals remain resilient, and financial policy remains prudent. As such, the default rate is expected to be lower as well. However, like any other segment of the market, investors need to be selective and choose issuers/regions that have better fundamentals. And that’s the approach that the management team of the <a target="_blank" href="https://www.wisdomtree.com/investments/etfs/fixed-income/emcb">WisdomTree Emerging Market Corporate Bond Fund (EMCB)</a> takes. <a target="_blank" href="https://www.wisdomtree.com/investments/etfs/fixed-income/emcb" style="color: #37bac0;">EMCB</a> is positioned with an over-weight (relative to the <a href="/blog/glossary#J.P. Morgan CEMBI Broad Diversified Core Index#J.P.">JPMorgan CEMBI Diversified Index</a>) to Latin America and an under-weight to Africa and select countries in Asia, most notably China. China’s strengthened policy response appears to have stabilized activity; however, growth is likely to slow further this year as housing and private sector confidence remain negative.</p>  <img alt="" src="https://www.wisdomtree.com/investments/-/media/us-media-files/blog/blog-images-2/2024/march/rising-titans-the-allure-of-emerging-market-corporates/figure-7-1.jpg" style="height:250px; width:442px;" /> <p> </p><p style="font-family:Verdana; font-size:12px; font-weight:bold">Important Risks Related to this Article</p><p>There are risks associated with investing, including the possible loss of principal. Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty. Investments in emerging, offshore or frontier markets are generally less liquid and less efficient than investments in developed markets and are subject to additional risks, such as risks of adverse governmental regulation and intervention or political developments. Derivative investments can be volatile, and these investments may be less liquid than other securities and more sensitive to the effects of varied economic conditions.&nbsp;&nbsp;</p> <p>Fixed income investments are subject to interest rate risk; their value will normally decline as interest rates rise. In addition, when interest rates fall, income may decline. Fixed income investments are also subject to credit risk, the risk that the issuer of a bond will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer&rsquo;s ability to make such payments will cause the price of that bond to decline. Unlike typical exchange-traded funds, there is no index that the Fund attempts to track or replicate. Thus, the ability of the Fund to achieve its objective will depend on the effectiveness of the portfolio manager. Please read the Fund&rsquo;s prospectus for specific details regarding the Fund&rsquo;s risk profile.</p> <div>&nbsp;</div>]]>{41359DC5-6FCD-4CE6-B3E3-A39A140824BE}https://www.wisdomtree.com/investments/blog/2024/03/15/indian-equities-remain-a-bright-spot-in-global-equity-allocationsIndiaEmerging MarketsIndian Equities Remain a Bright Spot in Global Equity AllocationsThe Indian economy, yet again, has outdone investor expectations with growth up by 8.4% in the third quarter of the 2024 financial year,1 marking the &#8230;Fri, 15 Mar 2024 07:30:00 ZAneeka Gupta<![CDATA[<p>The Indian economy, yet again, has outdone investor expectations with growth up by 8.4% in the third quarter of the 2024 financial year,<sup>1</sup> marking the fastest pace seen in six quarters. During the quarter, manufacturing (which accounts for 17% of the economy) posted the highest growth at 11.6% year on year (YOY), while agriculture (15% of the economy) remained a drag at -0.8% YOY as a result of uneven rain.<sup>2</sup> The services sector remained resilient, posting an increase of 7% YOY.<sup>2</sup></p> <p><strong>GDP Growth Expected to Rise 7.6% in F2024</strong></p> <p> <img alt="" src="https://www.wisdomtree.com/investments/-/media/us-media-files/blog/blog-images-2/2024/march/indian-equities-remain-a-bright-spot-in-global-equity-allocations/figure-1.jpg" style="height:382px; width:756px;" /></p> <p>Weak global demand has been driving exports of goods and services lower with an increase of only 3.4% (vs. 5.3% in Q2).<sup>2</sup> With services positioned favorably, imports are rising at a faster clip of 8.3% (vs. 11.9% in Q2).<sup>2</sup> Despite the uptick in third-quarter GDP, underlying growth continues to be supported by investment, which grew at 10.6% YOY, led by government spending and residential real estate.<sup>1</sup> Private final consumption expenditure, an indicator of consumption demand, lagged with only a 3.5% increase, below the broader economy.<sup>2</sup></p> <p><strong>Positive GDP Surprise Should Not Make the RBI Hawkish</strong></p> <p>The Reserve Bank of India’s (RBI) projection for growth in the third quarter, of 6.5%, was in line with <a href="/blog/glossary#gross-value-added">gross value added (GVA)</a>, which grew at 6.5%.<sup>2</sup> The gap between <a href="/blog/glossary#gross-domestic-product">GDP</a> and GVA in the quarter can be explained by rising tax collections and a decline in government subsidies. Economic activity is expected to moderate over the coming quarters. The GVA, which excludes net indirect taxes, provides a better measure of underlying momentum in the economy.</p> <p>There have also been encouraging signs of easing inflationary pressure, especially the moderation in food prices <a href="/blog/glossary#inflation">inflation</a>. The RBI has kept interest rates unchanged at 6.5% and maintained a hawkish stance for most of 2023. As we do not find signs of over-heating in the Q3 GDP data, we expect the RBI to maintain its February view of “waiting a bit longer” to cut back on the resilient growth.  </p> <p><strong>Inflation Is Approaching the RBI’s Inflation Target</strong></p> <p> <img alt="" src="https://www.wisdomtree.com/investments/-/media/us-media-files/blog/blog-images-2/2024/march/indian-equities-remain-a-bright-spot-in-global-equity-allocations/figure-2.jpg" style="height:379px; width:759px;" /></p> <p><strong>Resilient Earnings Results in Third Quarter </strong></p> <p>The <a href="/blog/glossary#nifty-index">Nifty 50 Index</a> reported revenue growth of 9% in the third quarter alongside a net profit growth of 15%, exceeding consensus expectations. This highlights a slight decline in revenue expansion (14% over the past five quarters) yet was offset by higher profitability growth (12% over the past five quarters). Banks remained at the forefront from the aspect of revenue generation, while automobiles stood out among the top performers both from a revenue and earnings standpoint.</p> <p><strong>Nifty Index Earnings Results</strong></p> <p><strong></strong><img alt="" src="https://www.wisdomtree.com/investments/-/media/us-media-files/blog/blog-images-2/2024/march/indian-equities-remain-a-bright-spot-in-global-equity-allocations/figure-3.jpg" style="height:472px; width:742px;" /></p> <p>India’s financial sector has been an important pillar for stability and growth prospects. The banking sector exhibited healthy business growth in the third quarter. However persistent <a href="/blog/glossary#net-interest-margin">net interest margin (NIM)</a> pressure and high operational expenditure caused a dip in margins. Credit growth was driven by the retail sector. Retail loans formed 31% of banking credit followed by services at 27.8%, industries at 23.5% and agriculture at 13%. The corporate sector saw a gradual pick up aided by medium-sized enterprises.  </p> <p>The automotive sector provided stellar results over the quarter, aided by the decline in commodity prices, alleviation of supply-chain challenges and stability in FX rates. The USD-INR (Indian rupee) held within a narrow 3% range in 2023, mostly between 80.00 and 83.50. INR depreciated by just 0.6% relative to USD in 2023 compared to over 10% in 2022. Auto volumes (excluding tractors) grew at 16% annually led by a healthy recovery in two-wheelers and stable growth across other segments. Two-wheelers witnessed the sharpest growth of nearly 19% YOY during Q3. Demand for premium cars also remained strong, mainly in the urban areas.</p> <p>The subdued results of the information technology sector were influenced by macroeconomic conditions, lower discretionary spending and seasonality. Attrition rates hit all-time lows for India’s IT sector in the quarter.</p> <p>While the real estate sector dragged down overall earnings performance for the Nifty Index, the energy, pharma, metals and public sector enterprises (PSE) sectors displayed steady annual earnings growth in Q3.</p> <p><strong>Adopting an Earnings Bias to Tap into Indian Equities</strong></p> <p>For investors looking to tap into India’s buoyant earnings growth at a discount, the <a target="_blank" href="https://www.wisdomtree.com/investments/etfs/equity/epi">WisdomTree India Earnings Fund (EPI)</a>, which seeks to track the <a target="_blank" href="https://www.wisdomtree.com/investments/index/wtind">WisdomTree India Earnings Index</a>, offers a unique opportunity as it aims to lower the valuation risk inherent in buying Indian equities. <a target="_blank" href="https://www.wisdomtree.com/investments/etfs/equity/epi" style="color: #37bac0;">EPI's</a> strategy represents the broadest possible cross-section of investable and profitable Indian companies. </p> <p>At WisdomTree, we optimize <a href="/blog/glossary#valuation">valuation</a>, by weighting by earnings and eliminating unprofitable companies, thereby allowing the more profitable companies to dominate the weighting in the Index. The unique earnings tilt allows <a target="_blank" href="https://www.wisdomtree.com/investments/etfs/equity/epi" style="color: #37bac0;">EPI</a> to provide investors with access to the broad market but at a more reasonable valuation, evident from the chart below.</p> <p><strong>Comparison of Fundamentals</strong></p> <p> <img alt="" src="https://www.wisdomtree.com/investments/-/media/us-media-files/blog/blog-images-2/2024/march/indian-equities-remain-a-bright-spot-in-global-equity-allocations/figure-4.jpg" style="height:389px; width:744px;" /></p> <p>By earnings-weighting our strategy, the portfolio takes on some unique sector tilts compared to a <a href="/blog/glossary#market-capitalization">market cap-weighted</a> approach. Over the past year, utilities, energy, industrials and financials provided the highest contributions across sectors, enabling the WisdomTree India Earnings Index to outperform the MSCI India Index by 10.49%. </p> <p><strong>Sector Attribution: 1-Year</strong></p> <img alt="" src="https://www.wisdomtree.com/investments/-/media/us-media-files/blog/blog-images-2/2024/march/indian-equities-remain-a-bright-spot-in-global-equity-allocations/figure-5.jpg" style="height:397px; width:736px;" />  <p><strong>Less </strong><strong>Concentration and Greater Diversification</strong></p> <p>The Q3 FY24 earnings results for the Nifty 50 Index (market cap-weighted) showed that<strong> Tata Motors, HDFC Bank, Tata Steel, ICICI Bank </strong>and <strong>JSW Steel </strong>contributed 56% of incremental YOY accretion in earnings. That, in our view, appears to be quite concentrated exposure within the Nifty 50 Index. The WisdomTree India Earnings Index’s earnings-weighted strategy enables less concentration. The contribution to earnings growth from <strong>Tata Motors, HDFC Bank, Tata Steel, ICICI Bank </strong>and <strong>JSW Steel is much lower, at 26% for <a target="_blank" href="https://www.wisdomtree.com/investments/etfs/equity/epi">WisdomTree India Earnings Fund</a> versus the Nifty 50 Index at 56% or even MSCI India at 33.6%.</strong></p> <p>The earnings-weighted methodology of the WisdomTree India Earnings Index also allows for greater diversification across size. While <a href="/blog/glossary#msci-india-index">MSCI India</a> has a much higher exposure to large caps at 84%, WisdomTree’s India Earnings Index has 64% of its weight in large caps and the rest distributed across mid-caps at 25% and small caps at 11.2%. The attribution by size illustrates the benefit of diversification across size over the long term (three years) that helped WisdomTree India Earnings Index outperform the MSCI India Index by 7.51%</p> <p><strong>Size Attribution: 3 Years</strong></p> <p> <img alt="" src="https://www.wisdomtree.com/investments/-/media/us-media-files/blog/blog-images-2/2024/march/indian-equities-remain-a-bright-spot-in-global-equity-allocations/figure-6.jpg" style="height:390px; width:696px;" /></p> <p><strong>Conclusion</strong></p> <p>India is the fifth-largest economy in the world and remains the fastest growing among the large economies with sustainable real GDP growth of 6%–7% per annum predicted over the next several years. Government reforms, a systematic clean-up of the system and digitization have been the key catalysts in boosting its growth trajectory. If one considers the first nine months of India’s financial year, ending March 31, we have seen stocks on the Nifty Index deliver 26% earnings growth.<sup>3</sup> Expectations for <a href="/blog/glossary#earnings-per-share">earnings per share (EPS)</a> growth remain high at 21% and 17% in FY24 and FY25. India appears well-cushioned against external vulnerabilities and is positioned favorably within global equity allocations.</p> <p> </p> <p> </p> <p> <sup>1</sup> October to December, Q3 in financial year, ending 3/31/24<br /> <sup>2</sup> Source: National Statistics Office  <br /> <sup>3</sup> Source: ACE Equity</p> <p> </p><p style="font-family:Verdana; font-size:12px; font-weight:bold">Important Risks Related to this Article</p><p><strong>Past performance is not indicative of future results. Investment return and principal value of an investment will fluctuate so that an investor&rsquo;s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted.&nbsp;<br /> </strong></p> <p><strong>For the most recent month-end and standardized performance and to download the respective Fund prospectus please click <a target="_blank" href="https://www.wisdomtree.com/investments/etfs/equity/epi" style="color: #37bac0;">here</a>.&nbsp;</strong></p> <p>For current Fund holdings, please click <a target="_blank" href="https://www.wisdomtree.com/investments/etfs/equity/epi">here</a>. Holdings are subject to risk and change.</p> <p>There are risks associated with investing, including the possible loss of principal. Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty. This Fund focuses its investments in India, thereby increasing the impact of events and developments associated with the region which can adversely affect performance. Investments in emerging, offshore or frontier markets such as India are generally less liquid and less efficient than investments in developed markets and are subject to additional risks, such as risks of adverse governmental regulation and intervention or political developments. As this Fund has a high concentration in some sectors, the Fund can be adversely affected by changes in those sectors. Due to the investment strategy of this Fund it may make higher capital gain distributions than other ETFs. Please read the Fund&rsquo;s prospectus for specific details regarding the Fund&rsquo;s risk profile.</p>]]>{0CC70038-027F-4D64-8B07-6B66A3D8D9CA}https://www.wisdomtree.com/investments/blog/2024/03/14/a-time-tested-strategy-for-the-new-rate-regime-laddered-treasury-solutionsFixed IncomeNew Rate RegimeA Time-Tested Strategy for the New Rate Regime: Laddered Treasury SolutionsThe new rate regime has presented investors with a fixed income backdrop that hasn’t been witnessed in more than a decade and a half. Against this bac&#8230;Thu, 14 Mar 2024 08:00:00 ZRick HarperKevin Flanagan<![CDATA[<p>The <a target="_blank" href="https://www.wisdomtree.com/investments/strategies/fixed-income">new rate regime</a> has presented investors with a fixed income backdrop that hasn’t been witnessed in more than a decade and a half. Against this backdrop, bond portfolio decision-making has been presented with a new, or shall we say “old,” opportunity for positioning. With income back in fixed income and uncertainty surrounding the macro outlook, investors can now turn to a time-tested strategy to help navigate the potentially choppy waters in the bond market going forward: laddered Treasury solutions.</p> <p>Certainly, a key benefit from the rise in U.S. interest rates from their COVID-19-related historical lows is that investors are now clearly presented with a better risk-return profile in the fixed income markets. As a result, more income has become available per unit of <a href="/blog/glossary#interest-rate-risk">interest rate risk</a>, with potential returns exceeding <a href="/blog/glossary#inflation">inflation</a>. This bond market landscape stands in stark contrast to the <a href="/blog/glossary#zero-interest-rate-policy">zero interest rate policy (ZIRP)</a> that was adopted and maintained by many central banks (including the <a href="/blog/glossary#federal-reserve">Fed</a>) for much of the 2010–2022 period.</p> <p><strong>Yield/Duration for 2-Yr Treasury Note, 2000–2024</strong></p> <p> <img alt="" src="https://www.wisdomtree.com/investments/-/media/us-media-files/blog/blog-images-2/2024/march/a-time-tested-strategy-for-the-new-rate-regime-laddered-treasury-solutions/figure-1.jpg" style="height:383px; width:772px;" /></p> <p><strong>Yield/Duration for 10-Yr Treasury Note, 2000–2024</strong></p> <img alt="" src="https://www.wisdomtree.com/investments/-/media/us-media-files/blog/blog-images-2/2024/march/a-time-tested-strategy-for-the-new-rate-regime-laddered-treasury-solutions/figure-2-1.jpg" style="height:426px; width:774px;" />  <p>This point can be underscored by the relationship between yield and <a href="/blog/glossary#duration">duration</a> from a historical perspective, as illustrated in the above graphs. In other words, investors are now able to achieve a visibly higher yield as it relates to the underlying duration of a Treasury security, whether it’s a 2- or a 10-year maturity. This development has brought a “return to normalcy” for the <a href="/blog/glossary#treasury">U.S. Treasury (UST)</a> market that didn’t exist following the <a href="/blog/glossary global financial crisis#the">great financial crisis</a> and through COVID-19.</p> <p><strong>So, How Can Investors Take Advantage of This New (Old) Rate Regime?</strong></p> <p>WisdomTree has created laddered Treasury strategies to take advantage of the opportunities that may now exist in the money and <a href="/blog/glossary#bond-market">bond markets</a>. We believe this time-tested approach offers diversified risk exposures around key parts of the <a href="/blog/glossary#curve">yield curve</a> and involves equal-weighted market exposures laddered across the maturity range.</p> <ul> <li><strong><a target="_blank" href="https://www.wisdomtree.com/investments/etfs/fixed-income/ussh" style="color: #37bac0;">WisdomTree 1-3 Year Laddered Treasury Fund</a></strong> <ul> <li><strong></strong>Investors who are looking to manage interest rate risk while also positioning their fixed income portfolio for shifts in Federal Reserve policy may consider the <a target="_blank" href="https://www.wisdomtree.com/investments/etfs/fixed-income/ussh">WisdomTree 1-3 Year Laddered Treasury Fund (USSH)</a>. <a target="_blank" href="https://www.wisdomtree.com/investments/etfs/fixed-income/ussh" style="color: #37bac0;">USSH</a> seeks to track the price and yield performance, before fees and expenses, of the <a href="/blog/glossary#bloomberg-us-treasury-1-3-year-laddered-index">Bloomberg U.S. Treasury 1-3 Year Laddered Index</a>.</li> </ul> </li> </ul> <ul> <li><strong><a target="_blank" href="https://www.wisdomtree.com/investments/etfs/fixed-income/usin" style="color: #37bac0;">WisdomTree 7-10 Year Laddered Treasury Fund</a></strong> <ul> <li><strong></strong>Investors who are looking to moderately add duration and position their bond portfolio for changes in growth and inflation expectations may consider the <a target="_blank" href="https://www.wisdomtree.com/investments/etfs/fixed-income/usin">WisdomTree 7-10 Year Laddered Treasury Fund (USIN)</a>. <a target="_blank" href="https://www.wisdomtree.com/investments/etfs/fixed-income/usin" style="color: #37bac0;">USIN</a> seeks to track the price and yield performance, before fees and expenses, of the <a href="/blog/glossary#bloomberg-us-treasury-7-10-year-laddered-index">Bloomberg U.S. Treasury 7-10 Year Laddered Index</a>.</li> </ul> </li> </ul> <p>Both strategies focus on the most recently issued securities that mature for a designated month or quarter to preserve a high level of liquidity within the strategy. Both strategies focus on a subset of available Treasury securities within the maturity bands, selecting the most recently issued securities that mature for a designated month or quarter. This focus seeks to further enhance the high degree of liquidity already present in investment in Treasury securities.</p> <p>There will be a monthly rebalancing for each Fund, where the 1–3-year Index rotates securities monthly while the 7–10-year Index reconstitutes quarterly, in line with the Treasury issuance of the new 10-Year note every February, May, August and November.</p> <p><strong>Fed Funds Target Rate and Treasury Yields</strong></p> <p> <img alt="" src="https://www.wisdomtree.com/investments/-/media/us-media-files/blog/blog-images-2/2024/march/a-time-tested-strategy-for-the-new-rate-regime-laddered-treasury-solutions/figure-3.jpg" style="height:373px; width:726px;" /></p> <p><strong>What Role Can Laddered Exposures to Short and Intermediate Treasuries Play in Investor Portfolios?</strong></p> <p>Laddered Treasury strategies provide critical building blocks that we believe are straightforward, intuitive and disciplined while serving a variety of functions within investor portfolios. At their core, this approach may offer a source of high-quality income, with each strategy providing the ability to position around key points of the curve. As highlighted by the above graph, the shorter-dated UST sector of the yield curve is highly sensitive to expectations about Federal Reserve policy, while the intermediate part is more sensitive to changes in long-term growth and inflation expectations.</p> <p><strong>Conclusion</strong></p> <p>With the addition of these new Laddered Treasury Funds (<a target="_blank" href="https://www.wisdomtree.com/investments/etfs/fixed-income/ussh" style="color: #37bac0;">USSH</a> and <a target="_blank" href="https://www.wisdomtree.com/investments/etfs/fixed-income/usin" style="color: #37bac0;">USIN</a>) to our <a target="_blank" href="https://www.wisdomtree.com/investments/etfs/fixed-income/usfr">Floating Rate Treasury Fund (USFR)</a>, WisdomTree now offers investors a suite of Treasury products that can act as a powerful toolkit to effectively manage a variety of interest rate scenarios. </p> <p> </p><p style="font-family:Verdana; font-size:12px; font-weight:bold">Important Risks Related to this Article</p>There are risks associated with investing, including the possible loss of principal. Because the Fund is new, it has no performance history. U.S. Treasury obligations may provide relatively lower returns than those of other securities. Changes to the financial condition or credit rating of the U.S. government may cause the value to decline. Fixed income securities are subject to interest rate, credit, inflation and reinvestment risks. Generally, as interest rates rise, the value of fixed income securities falls. Please read the Fund&rsquo;s prospectus for specific details regarding the Fund&rsquo;s risk profile.]]>{B03F1824-D9D7-4E70-BFEB-1F85F04045F4}https://www.wisdomtree.com/investments/blog/2024/03/12/where-in-the-world-have-small-caps-performed-bestSmall CapsEmerging MarketsWhere in the World Have Small Caps Performed Best?Many are drawn to large-cap stocks, especially the technology giants that have dominated the market in recent years. These mega-cap companies have sho&#8230;Tue, 12 Mar 2024 11:00:00 ZJeremy Schwartz, CFA<![CDATA[<p>Many are drawn to <a href="/blog/glossary#large-cap">large-cap</a> stocks, especially the technology giants that have dominated the market in recent years. These mega-cap companies have shown impressive growth and resilience amid the pandemic and the economic downturn, while <a href="/blog/glossary#small-caps">small caps</a> have languished both in absolute and relative terms.</p> <p>But there are some locations where small caps have done quite well, and they may surprise you. Small caps in <a href="/blog/glossary#emerging-market">emerging markets (EM)</a> have shown strong performance and diversification benefits, as well as higher dividend yields and lower valuations than U.S. small caps.</p> <p>For all the talk of the “death” of the size factor, small caps have handily outperformed large caps in EM for the last decade.</p> <p><strong>Trailing 10-Year Returns: Small vs. Large Caps</strong></p> <p><strong><img alt="" src="https://www.wisdomtree.com/investments/-/media/us-media-files/blog/blog-images-2/2024/march/where-in-the-world-have-small-caps-performed-best/figure-1-1.jpg" style="height:362px; width:595px;" /></strong></p> <p> </p> <p>In addition to the strong relative performance case, some other points we’ll review that may be surprising:</p> <ul> <li><strong>Do small caps even pay dividends in emerging markets? </strong>The universe is quite large and broad-based. More than 80% of EM small caps pay a dividend, and the weighted average <a href="/blog/glossary#dividend-yield">dividend yield</a> is more than 5% on the <a target="_blank" href="https://www.wisdomtree.com/investments/index/wtemsc">WisdomTree EM SmallCap Dividend Index</a><sup>1</sup></li> </ul> <ul> <li><strong>Emerging market small caps had lower <a href="/blog/glossary#volatility">volatility</a> </strong>than U.S. small caps as measured by the <a href="/blog/glossary#msci-em-small-cap-index">MSCI EM Small Cap Index</a> compared to the <a href="/blog/glossary#russell-2000-index">Russell 2000</a> over the trailing 3-, 5- and 10-year <a href="/blog/glossary#standard-deviation">standard deviations</a><sup>2</sup></li> </ul> <ul> <li><strong>While U.S. small-cap indexes are littered with many unprofitable companies,</strong> WisdomTree’s EM small-cap Index filters for profitable dividend payers that favor higher-quality companies as opposed to the more speculative titled U.S. small-cap indexes</li> </ul> <p>Let’s drill into each of these points in more detail.</p> <p><strong>Performance: Five Stars</strong></p> <p>The <a target="_blank" href="https://www.wisdomtree.com/investments/etfs/equity/dgs">WisdomTree Emerging Markets SmallCap Dividend Fund (DGS)</a> received the prestigious five-star accolade from Morningstar, which is one way of quickly surmising it has strong risk-adjusted performance relative to its broad emerging market category.<sup>3</sup></p> <p>Over the last 10- and 15-year periods, <a target="_blank" href="https://www.wisdomtree.com/investments/etfs/equity/dgs" style="color: #37bac0;">DGS</a> ranked in the top decile of the emerging markets category, with more than 2% per year better performance than the category average return.</p> <p>Over the last three years, while the average emerging market fund had a -5% per year return, <a target="_blank" href="https://www.wisdomtree.com/investments/etfs/equity/dgs" style="color: #37bac0;">DGS</a> had a +5.8% per year return—a dramatic spread of outperformance.</p> <p><strong>Morningstar Performance: WisdomTree Emerging Markets SmallCap Dividend Fund (DGS)</strong></p> <p> <img alt="" src="https://www.wisdomtree.com/investments/-/media/us-media-files/blog/blog-images-2/2024/march/where-in-the-world-have-small-caps-performed-best/figure-2.jpg" style="height:467px; width:760px;" /></p> <p>What are some of the drivers of this? Many of the major benchmarks and active funds had heavy exposure to the Chinese technology companies that came under significant pressure. Focusing on dividend payers avoided those stocks.</p> <p><strong>Dividends a Key Sign of Quality</strong></p> <p>The <a target="_blank" href="https://www.wisdomtree.com/investments/etfs/equity/dgs">WisdomTree Emerging Markets SmallCap Dividend Fund (DGS)</a> seeks to track the price and yield performance, before fees and expenses, of the WisdomTree Emerging Markets SmallCap Dividend Index.</p> <p>Since the inception of the WisdomTree Emerging Markets SmallCap Dividend Index, it outperformed the broad emerging markets by 347 basis points annualized.</p> <p>Almost half the outperformance came from the top dividend-yielding stocks, which our Index had more than 40% exposure to on average, whereas the cap-weighted Index had less than 16% exposure.</p> <p>The stocks in our Index in this top-yielding quintile returned 7.36% per year, while the MSCI EM Index returned just 1.60% as a whole—showcasing the dividend factor as a key driver of relative returns.</p> <p>Even more interesting were the zero dividend payers in EM, which averaged almost 10% of the weight of the broad <a href="/blog/glossary#msci-emerging-markets-index">EM Index</a> and had -6.9% per year returns.</p> <p><strong>Index <a href="/blog/glossary#dividend-yield">Dividend Yield Attribution</a>: WisdomTree Emerging Markets SmallCap Dividend Fund vs. MSCI Emerging Markets Index</strong></p> <p> <img alt="" src="https://www.wisdomtree.com/investments/-/media/us-media-files/blog/blog-images-2/2024/march/where-in-the-world-have-small-caps-performed-best/figure-3.jpg" style="height:491px; width:799px;" /></p> <p><strong>Russell 2000 vs. EM Small Caps</strong></p> <p>People don’t think of U.S. small caps and dividends going together. Only half of companies pay a dividend.<sup>4</sup></p> <p>The culture of paying dividends is much more prevalent in emerging markets.</p> <p>DGS includes almost 1,000 companies with an average market cap similar to the levels in the Russell and a slightly higher median market cap.</p> <p>The dividend yield averages more than 5% for DGS and just 1.4% for the Russell 2000.</p> <p>Twenty-six percent of the Russell 2000 is not profitable, while less than 1% of DGS is not profitable.</p> <p><strong>Characteristics and Fundamentals Comparison</strong></p> <p> <img alt="" src="https://www.wisdomtree.com/investments/-/media/us-media-files/blog/blog-images-2/2024/march/where-in-the-world-have-small-caps-performed-best/figure-4.jpg" style="height:686px; width:742px;" /></p> <p><strong><em>For the most recent month-end standardized performance, please click <strong><em><a target="_blank" href="https://www.wisdomtree.com/investments/etfs/equity/dgs" style="color: #37bac0;">here</a></em></strong>.</em></strong></p> <p>Emerging market small caps are an attractive asset class for investors seeking diversification, growth potential and income. However, not all emerging market small caps are created equal, and some may expose investors to higher risks and lower returns.</p> <p><strong>EM Small Caps Lower Volatility </strong><strong>Than U.S. Small Caps</strong></p> <p>You might think EM small caps involve a lot more risk than U.S. small caps, but the data on historical volatility shows <a target="_blank" href="https://www.wisdomtree.com/investments/etfs/equity/dgs" style="color: #37bac0;">DGS</a> had lower volatility over all longer periods than U.S. small caps.</p> <p>Over 10 years, <a target="_blank" href="https://www.wisdomtree.com/investments/etfs/equity/dgs" style="color: #37bac0;">DGS</a> had similar volatility as broad EM large caps.</p> <p><strong>Volatility Comparison</strong></p> <p> <img alt="" src="https://www.wisdomtree.com/investments/-/media/us-media-files/blog/blog-images-2/2024/march/where-in-the-world-have-small-caps-performed-best/figure-5.jpg" style="height:373px; width:762px;" /></p> <p><strong><em>For the most recent month-end standardized performance, please click <a target="_blank" href="https://www.wisdomtree.com/investments/etfs/equity/dgs" style="color: #37bac0;">here</a>.</em></strong></p> <p>And over every standardized period, it had a <a href="/blog/glossary#down-capture">down capture</a> below 90%, cushioning some of the drawdown in down months for the MSCI EM Index.</p> <p><strong>Down Capture Comparison</strong></p> <p> <img alt="" src="https://www.wisdomtree.com/investments/-/media/us-media-files/blog/blog-images-2/2024/march/where-in-the-world-have-small-caps-performed-best/figure-6.jpg" style="height:210px; width:768px;" /></p> <p>The biggest sector difference between <a target="_blank" href="https://www.wisdomtree.com/investments/etfs/equity/dgs" style="color: #37bac0;">DGS</a> and the Russell 2000 is in Health Care, where there are a vast number of unprofitable biotech companies in the U.S.</p> <p>Relative to the MSCI EM Index, <a target="_blank" href="https://www.wisdomtree.com/investments/etfs/equity/dgs" style="color: #37bac0;">DGS</a> has less exposure to Communication Services, Financials and Information Technology—sectors where major Chinese tech companies (Comm. Svcs. and Info. Tech.) and Chinese SOE banks (Financials) are populated.</p> <p><img alt="" src="https://www.wisdomtree.com/investments/-/media/us-media-files/blog/blog-images-2/2024/march/where-in-the-world-have-small-caps-performed-best/figure-7.jpg" style="height:424px; width:734px;" /></p> <p>From a country perspective, we mentioned that the performance of <a target="_blank" href="https://www.wisdomtree.com/investments/etfs/equity/dgs" style="color: #37bac0;">DGS</a> has benefited from both an absolute return and risk perspective by being underexposed to China—8% for <a target="_blank" href="https://www.wisdomtree.com/investments/etfs/equity/dgs" style="color: #37bac0;">DGS</a> versus 25% for MSCI EM.</p> <p>In exchange for less China exposure, there is an increased allocation to Taiwan, South Africa, Thailand and Malaysia.  </p> <p>For investors looking to minimize the China risk, <a target="_blank" href="https://www.wisdomtree.com/investments/etfs/equity/dgs" style="color: #37bac0;">DGS</a> offers a compelling solution without having to make a single country or regional bet.</p> <p><strong>Country Comparison</strong></p> <p> <img alt="" src="https://www.wisdomtree.com/investments/-/media/us-media-files/blog/blog-images-2/2024/march/where-in-the-world-have-small-caps-performed-best/figure-8.jpg?h=405&w=501&hash=21EDBAF3040145BA8D96C673B65DBA7F" style="height:405px; width:501px;" /></p> <p><strong>Conclusion</strong></p> <p>Emerging market small caps are an attractive asset class for investors seeking diversification, growth potential and income. However, investors need to be selective and avoid the pitfalls of traditional market cap weighting, which can expose them to higher risks and lower returns.</p> <p><a target="_blank" href="https://www.wisdomtree.com/investments/etfs/equity/dgs" style="color: #37bac0;">DGS</a>, the WisdomTree Emerging Markets SmallCap Dividend Fund, offers a dividend-weighted approach that aims to enhance the risk-return profile of emerging market small caps and deliver higher income and lower volatility than the broader benchmarks.</p> <p><a target="_blank" href="https://www.wisdomtree.com/investments/etfs/equity/dgs" style="color: #37bac0;">DGS</a> outperformed the broader benchmarks thanks to its dividend-weighted methodology, sector and country allocation and exposure to value and quality factors.</p> <p> </p> <p> </p> <p><sup>1</sup> Sources: WisdomTree, FactSet, MSCI, as of 1/31/24. Percent of EM small-cap dividend payers based on sum of index weight for dividend payers in the MSCI Emerging Markets Small Cap Index.</p> <p><a href="#_ftnref2" name="_ftn2"><sup></sup></a><sup>2</sup> Sources: WisdomTree, MSCI, Russell, as of 1/31/24.</p> <p><a href="#_ftnref3" name="_ftn3"><sup></sup></a><sup>3</sup> Morningstar Rating as of 1/31/24. Category: Diversified Emerging Markets. Overall rank based on 716 funds in category, 3-year percentile rank based on 716 funds in category, 5-year percentile rank based on 660 funds in category, 10-year percentile rank based on 402 funds in category.</p> <p>The Morningstar Rating for Funds, or “star rating,” is calculated for managed products with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product’s monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance.</p> <p>The top 10% of products in each product category receive five stars, the next 22.5% receive four stars, the next 35% receive three stars, the next 22.5% receive two stars, and the bottom 10% receive one star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three- and five-year Morningstar Rating metrics. The weights are: 100% three-year rating for 36–59 months of total returns and 60% five-year rating/40% three-year rating for 60–119 months of total returns.</p> <p><a href="#_ftnref4" name="_ftn4"><sup></sup></a><sup>4</sup> Sources: WisdomTree, FactSet, Russell, as of 1/31/24. U.S. small caps measured by the Russell 2000 Index.</p><p style="font-family:Verdana; font-size:12px; font-weight:bold">Important Risks Related to this Article</p><p>There are risks associated with investing, including the possible loss of principal. Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty. Funds focusing on a single sector and/or smaller companies generally experience greater price volatility. Investments in emerging, offshore or frontier markets are generally less liquid and less efficient than investments in developed markets and are subject to additional risks, such as risks of adverse governmental regulation, intervention and political developments. Due to the investment strategy of this Fund, it may make higher capital gain distributions than other ETFs. Dividends are not guaranteed, and a company currently paying dividends may cease paying dividends at any time. Please read the Fund&rsquo;s prospectus for specific details regarding the Fund&rsquo;s risk profile.</p> <p>Morningstar percentile rankings are based on a fund&rsquo;s average annual total return relative to all funds in the same Morningstar category, which includes both mutual funds and ETFs and does not include the effect of sales charges. Fund performance used within the ranking reflects certain fee waivers, without which returns and Morningstar rankings would have been lower. The highest (or most favorable) percentile rank is 1, and the lowest (or least favorable) percentile rank is 100. Past performance does not guarantee future results.</p> <p>Morningstar, Inc. All Rights Reserved. The information herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.</p> <div>&nbsp;</div>]]>{6CE2EF0D-D098-4CCD-845B-DC8F79FFEF87}https://www.wisdomtree.com/investments/blog/2024/03/12/adding-meta-to-the-wisdomtree-dividend-indexesIndex Rebalance SeriesDividendsAdding Meta to the WisdomTree Dividend IndexesOn February 1, Meta Platforms Inc. (Meta) declared the initiation of its quarterly dividend payment as part of its full-year 2023 results. The company&#8230;Tue, 12 Mar 2024 07:30:00 ZAlejandro Saltiel, CFA<![CDATA[<p>On February 1, Meta Platforms Inc. (Meta) declared the initiation of its quarterly dividend payment as part of its full-year 2023 results. The company announced a $0.50 quarterly payment, which represents an approximate $5 billion cash outlay and puts Meta in the top 30 of U.S. dividend payers and the top 50 of all dividend payers worldwide.</p> <p>This is a major development for Meta, as a dividend payment signals that a company’s management has confidence in its business and the cash flows associated with it. It is also a major market development, as Meta becomes the largest company (measured in <a href="/blog/glossary#market-capitalization">market capitalization</a>) to initiate its dividend payment since Apple in 2012.</p> <p>For context, Meta’s initial dividend payment represents about 12% of its annual earnings, which is still conservative with respect to its peers and the broader U.S. market. This means there is room for Meta’s dividends to grow.</p> <p><strong>Annual Dividend as % of Earnings</strong></p> <p> <img alt="" src="https://www.wisdomtree.com/investments/-/media/us-media-files/blog/blog-images-2/2024/march/adding-meta-to-the-wisdomtree-dividend-indexes/figure-1.jpg" style="height:446px; width:633px;" /></p> <p><strong>WisdomTree’s Reaction</strong></p> <p>Given this major market development and WisdomTree’s emphasis on creating best-in-class dividend-focused strategies, we announced a special rebalance set to take place after the close of trading on March 15. As part of this special rebalance, Meta will be added to the following eligible Indexes and weighted according to its <em><a href="/blog/glossary#dividend-stream">Dividend Stream</a></em><a href="/blog/glossary#dividend-stream">®</a>:</p> <ul> <li><a target="_blank" href="https://www.wisdomtree.com/investments/index/wtdi">WisdomTree U.S. Dividend Index (WTDI)</a></li> </ul> <ul> <li><a target="_blank" href="https://www.wisdomtree.com/investments/index/wtldi">WisdomTree U.S. LargeCap Dividend Index (WTLDI)</a> </li> </ul> <ul> <li><a target="_blank" href="https://www.wisdomtree.com/investments/index/wtdgi">WisdomTree U.S. Quality Dividend Growth Index (WTDGI) </a></li> </ul> <ul> <li><a target="_blank" href="https://www.wisdomtree.com/investments/index/wtdgnuhp">WisdomTree U.S. Quality Dividend Growth UCITS Index (WTDGNUHP)</a> </li> </ul> <ul> <li><a target="_blank" href="https://www.wisdomtree.com/investments/index/wtddg">WisdomTree Global Developed Quality Dividend Growth Index (WTDDG)</a> </li> </ul> <p>WisdomTree creates indexes with performance as the top goal. While we believe in passive methodologies, we always look for changes or unique market conditions that create opportunities. Meta’s first dividend was significant enough that it warranted an early addition to our index family.</p> <p><strong>Implications for Quality Dividend Growth Strategies</strong></p> <p>WTDGI, WTDGNUHP and WTDDG are all part of the WisdomTree Quality Dividend Growth suite. These strategies aim to invest in dividend-paying companies whose profitability and growth prospects indicate higher-than-market <a href="/blog/glossary#dividend-growth">dividend growth</a>.</p> <p>Most competitors in the dividend growth space have backward-looking growth screens to determine a company’s eligibility. For example, the <a href="/blog/glossary#sandp-us-dividend-growers-index">S&P U.S. Dividend Growers</a> and <a href="/blog/glossary#sandp-500-dividend-aristocrats">S&P 500 Dividend Aristocrats Indexes</a> (with a combined $88 billion plus of assets tracking them) have a 10- and 25-year dividend growth screen, respectively. This means that Meta will become eligible for inclusion in 2034 and 2049 <em>if</em> it continues to grow dividends annually.</p> <p>As we recently published, <a target="_blank" href="https://www.wisdomtree.com/investments/blog/2024/02/22/meta-pays-a-dividend">new dividend payers tend to grow their payments faster than the market</a>. In the below chart, we can see how Apple’s dividend growth since 2012 has outpaced the broad <a href="/blog/glossary#s-and-p-500-index">S&P 500</a> by 0.6% annually.</p> <p><strong>Growth of $100: Cumulative Dividend Growth</strong></p> <p><img alt="" src="https://www.wisdomtree.com/investments/-/media/us-media-files/blog/blog-images-2/2024/march/adding-meta-to-the-wisdomtree-dividend-indexes/figure-2.jpg" style="height:417px; width:732px;" /></p> <p>Examining the performance of WTDGI versus the S&P 500 provides further insight into its methodology. Since its inception in April 2013, WTDGI has outperformed the S&P 500 by 34 <a href="/blog/glossary#basis-point">basis points</a> annually,<sup>1</sup> doing so without holding non-dividend-paying tech companies like Amazon, Tesla, Meta and Google, which have been the main performance drivers for the market.</p> <p>The quality dividend growth franchise selection process focuses on highly profitable quality businesses. We often allude to this as the Buffett factor in stock selection—as Buffett often talks about moving from the Ben Graham <a href="/blog/glossary#value">value</a> school, which focuses on <em>fair </em>businesses at good <em>value </em>like prices, toward focusing on <em>great </em>businesses at fair prices.</p> <p>In the <a target="_blank" href="https://www.wisdomtree.com/investments/blog/2024/02/29/more-wise-words-from-warren">latest Berkshire letter</a>, Buffett wrote a tribute to Charlie Munger in the opening pages, calling Munger the <em>architect of </em>Berkshire Hathaway’s process that convinced Buffett he should not be buying cheap “value” like stocks but the high-quality businesses. Warren’s latest letter puts Munger as the original architect of our quality style of investing. </p> <p>What are Meta’s <strong><a href="/blog/glossary#quality">quality</a> and <a href="/blog/glossary#growth">growth</a></strong> attributes that exhibit why it is a great business and make us confident it should be a dividend growth leader over the coming years?</p> <ul> <li><strong>Efficiency</strong>: Meta was able to lower headcount by more than 20% while also growing revenue by more than 20% in the last 12 months—this is a sign of its scale and investments in technology paying off. Paying the first dividend is a commitment to shareholders that they will harvest their R&D investments over the years into cash flows for shareholders.</li> <li><strong>Quality</strong>: Meta’s trailing three-year <a href="/blog/glossary#return-on-equity">return on equity (ROE)</a> and <a href="/blog/glossary#return-on-assets">return on assets (ROA)</a> exceed the market.</li> </ul> <p><strong>Quality Metrics</strong></p> <p><img alt="" src="https://www.wisdomtree.com/investments/-/media/us-media-files/blog/blog-images-2/2024/march/adding-meta-to-the-wisdomtree-dividend-indexes/figure-3.jpg" style="height:448px; width:761px;" /></p> <ul> <li><strong>Composite Rank</strong>: WTDGI uses a composite score combining a company’s quality (ROE and ROA) and estimated earnings growth to rank and select securities. Meta ranks in the top 20 out of 550+ securities in scope on this composite measure with its solid quality number and an 18% estimated earnings growth over the next few years.</li> </ul> <p><strong>Implications for Broad Dividend Strategies</strong></p> <p>The implications of adding Meta to WTDI and WTLDI can be analyzed in the context of holdings overlap and tracking error versus the broad market. At the time of Meta’s dividend announcement, its weight in broad equity benchmarks like the S&P 500, <a href="/blog/glossary#russell-1000-index">Russell 1000</a> and <a href="/blog/glossary#msci-usa-index">MSCI USA Indexes</a> ranged around 2%. Upon inclusion in WTDI and WTLDI, we expect the under-weight in Meta to be significantly reduced but still exist, given its current market capitalization weight compared to its <em>Dividend Stream</em> weight.</p>  <img alt="" src="https://www.wisdomtree.com/investments/-/media/us-media-files/blog/blog-images-2/2024/march/adding-meta-to-the-wisdomtree-dividend-indexes/figure-4-2.jpg" style="height:377px; width:284px;" /> <p> </p> <p> </p> <p><sup>1</sup> Sources: WisdomTree, FactSet. Data from 4/11/13–1/31/24.</p>]]>{8BC10BCD-3359-413E-B805-BC3BABA669C1}https://www.wisdomtree.com/investments/blog/2024/03/07/whats-behind-this-active-emerging-market-portfolios-outperformanceMultifactorEmerging MarketsChinaWhat’s Behind this Active Emerging Market Portfolio’s OutperformanceTwo common inquiries from clients regarding an emerging markets portfolio are the appropriate weight for China and the extent of currency hedging requ&#8230;Thu, 07 Mar 2024 07:00:00 ZLiqian Ren<![CDATA[<p>Two common inquiries from clients regarding an emerging markets portfolio are the appropriate weight for China and the extent of currency hedging required. In our most actively managed emerging markets multifactor strategy and corresponding ETF, we address these concerns.</p> <p><strong>China’s Weight</strong></p> <p>The weight of China in a cap-weighted portfolio has significantly decreased from over 30% to around 22%, due to the aftermath of its highly leveraged housing bubble bursting and the increasing worry over continued crackdowns on private businesses since 2021. Despite its lower weight in popular benchmarks, China continues to dominate headlines as the U.S. identifies it as a major competitor, and we see little sign of major improvements coming for the U.S.-China relationship.</p> <p>While China is exploring fiscal and monetary policy remedies, we’ve previously discussed that it’s <a target="_blank" href="https://www.wisdomtree.com/investments/blog/2023/10/31/managing-currency-risk-in-an-emerging-market-portfolio">unlikely to pursue stimulated growth</a>. Concurrently, the U.S. continues to impose negative tech and trade restrictions.</p> <p>To address this ongoing tension and uncertainty for China exposure, we offer a variety of options for clients, ranging from completely excluding China, as seen in our <a target="_blank" href="https://www.wisdomtree.com/investments/etfs/equity/xc">growth-oriented ex-China Fund (XC)</a> and <a target="_blank" href="https://www.wisdomtree.com/investments/etfs/equity/dgre">EM Quality Dividend Fund (DGRE)</a>, to the dividend-weighted Funds like <a target="_blank" href="https://www.wisdomtree.com/investments/etfs/equity/dem">DEM</a> and <a target="_blank" href="https://www.wisdomtree.com/investments/etfs/equity/dgs">DGS</a> that follow a factor strategy and determine China’s weight accordingly.</p> <p>But in our most active multifactor strategy, <a target="_blank" href="https://www.wisdomtree.com/investments/etfs/equity/emmf">EMMF</a>, China’s weight is about 10%, which is an under-weight position but still significant enough to capture some upside.</p> <p><strong>Various Emerging Markets Funds with China Weights from 0% to Full Index Weight</strong></p> <p> <img alt="" src="https://www.wisdomtree.com/investments/-/media/us-media-files/blog/blog-images-2/2024/march/whats-behind-this-active-emerging-market-portfolios-outperformance/figure-1.jpg" style="height:416px; width:752px;" /></p> <p>The under-weight position in China in 2023 benefited <a target="_blank" href="https://www.wisdomtree.com/investments/etfs/equity/emmf">EMMF</a>, as it outperformed the benchmark by approximately 14%. However, China isn’t the primary reason for <a target="_blank" href="https://www.wisdomtree.com/investments/etfs/equity/emmf">EMMF's</a> outperformance.</p> <p>About 2.7% <a href="/blog/glossary#alpha">alpha</a> resulted from the Fund’s under-weight in China and 3.54% came from stock selection among Chinese stocks. The allocation and stock selection for India/Taiwan also added value, indicating the effectiveness of the factor model. On net total, stock selection accounts for twice as much outperformance than active country allocations.</p> <p><strong>EMMF Attribution for 2023: China accounts for half of outperformance, and more than half came from stock selection, not just allocation</strong></p> <p> <img alt="" src="https://www.wisdomtree.com/investments/-/media/us-media-files/blog/blog-images-2/2024/march/whats-behind-this-active-emerging-market-portfolios-outperformance/figure-2.jpg" style="height:406px; width:746px;" /></p> <p><strong>Currency Hedging</strong></p> <p>Hedging emerging markets currencies is typically costly. However, due to the higher relative interest rate in the U.S., hedging in several currencies, such as CNY and TWD, now yields a positive carry.</p> <p>We employ a <a target="_blank" href="https://www.wisdomtree.com/investments/blog/2023/10/31/managing-currency-risk-in-an-emerging-market-portfolio">factor-based dynamic currency model</a> which generally lowered portfolio risk by about 1% annually.</p> <p>As the below performance characteristics shows, under-weight allocations to China, factor bets on momentum and correlation, not just quality and value, which was implicit in the other strategy (<a target="_blank" href="https://www.wisdomtree.com/investments/etfs/equity/dgre" style="color: #37bac0;">DGRE</a>), and dynamic currency hedging has worked to significantly lower risk.</p> <p><img alt="" src="https://www.wisdomtree.com/investments/-/media/us-media-files/blog/blog-images-2/2024/march/whats-behind-this-active-emerging-market-portfolios-outperformance/figure-3-1.jpg" style="height:760px; width:800px;" /> </p> <p><strong><em>For the most recent month-end and standardized performances and to download the Fund prospectus, click <a target="_blank" href="https://www.wisdomtree.com/investments/etfs/equity/emmf">here</a>.</em></strong></p> <p><em>For definitions of terms in the tables above, please visit the <a target="_blank" href="https://www.wisdomtree.com/investments/glossary">glossary</a>. </em></p> <p><strong>Factor Models in Stock Selection</strong></p> <p>In the emerging markets, whether a company is a <a href="/blog/glossary#state-owned-enterprise">state-owned enterprise (SOE)</a> greatly impacts its profit margins. For the EM Multifactor Fund, we maintain a neutral weight in SOEs. In 2023, the factor-based stock selection model added value for both the SOE and <a href="/blog/glossary#ex-soes">non-SOE</a> universe, with higher effect in the non-state-owned universe.</p> <p><strong>EMMF 2023: Most outperformance came from stock selection, not allocation between SOE/XSOE</strong></p> <p> <img alt="" src="https://www.wisdomtree.com/investments/-/media/us-media-files/blog/blog-images-2/2024/march/whats-behind-this-active-emerging-market-portfolios-outperformance/figure-4.jpg" style="height:418px; width:730px;" /></p> <p><a target="_blank" href="https://www.wisdomtree.com/investments/etfs/equity/emmf">EMMF's</a> multifactor strategy is over-weight in traditional factors (value, quality, momentum and correlation) from a bottom-up approach. The portfolio is typically over-weight in all four factors from the model that includes both deep selection of a multifactor score and then a weighting process that tilts weight to these factors and away from just market cap and size.</p> <p><strong>EMMF 2023: Active Factor Weight</strong></p> <p> <img alt="" src="https://www.wisdomtree.com/investments/-/media/us-media-files/blog/blog-images-2/2024/march/whats-behind-this-active-emerging-market-portfolios-outperformance/figure-5.jpg" style="height:442px; width:707px;" /></p> <p>The allocation effect of all four factors added value. More importantly, the stock selection effects of the factors were even more significant for 2023. Across all factors, and from both ends, from the over-weight allocation of good factor stocks, and the under-weight allocation of bad factor stocks, it all added value.</p> <p><strong>2023: Outperformance from both the over-weight in good factor and under-weight in factor score stocks</strong></p> <p> <img alt="" src="https://www.wisdomtree.com/investments/-/media/us-media-files/blog/blog-images-2/2024/march/whats-behind-this-active-emerging-market-portfolios-outperformance/figure-6.jpg" style="height:417px; width:720px;" /></p> <p><strong>In Conclusion</strong></p> <p>In 2023, our most actively managed emerging markets portfolio had a successful year. Almost all models performed favorably, except for the currency model, though it did reduce the overall portfolio risk on top of the equity model.</p> <p>As the portfolio carries significant active weight, its performance can be excellent, as seen in 2023, or it can underperform significantly. However, we believe that over the long run, factor investing in both equity and currency will yield returns, and a moderate weight in China is appealing to investors concerned about geopolitical risk.</p><p style="font-family:Verdana; font-size:12px; font-weight:bold">Important Risks Related to this Article</p><p>Investing involves risk, the including possible loss of principal. Investments in non-U.S. securities involve political, regulatory and economic risks that may not be present in U.S. securities. For example, foreign securities may be subject to risk of loss due to foreign currency fluctuations, political or economic instability, or geographic events that adversely impact issuers of foreign securities. Derivatives used by the Fund to offset exposure to foreign currencies may not perform as intended. There can be no assurance that the Fund&rsquo;s hedging transactions will be effective. The value of an investment in the Fund could be significantly and negatively impacted if foreign currencies appreciate at the same time that the value of the Fund&rsquo;s equity holdings falls. While the Fund is actively managed, the Fund&rsquo;s investment process is expected to be heavily dependent on quantitative models and the models may not perform as intended.</p> <p>Additional risks specific to EMMF include but are not limited to emerging markets risk. Investments in securities and instruments traded in developing or emerging markets, or that provide exposure to such securities or markets, can involve additional risks relating to political, economic or regulatory conditions not associated with investments in U.S. securities and instruments or investments in more developed international markets. Please read the Fund&rsquo;s prospectus for specific details regarding the Fund&rsquo;s risk profile.</p> <div>&nbsp;</div>]]>{C3DDAB57-97D8-4E37-8BFE-FD39D424FC2E}https://www.wisdomtree.com/investments/blog/2024/03/06/behind-the-markets-podcast-exploring-a-new-faangBTM Podcast SeriesMarket NewsBehind the Markets Podcast: Exploring a New FAANG!We recently had the opportunity to interview Charles-Henry Monchau, CIO at Syz Group, on our Behind the Markets podcast. Monchau believes the current &#8230;Wed, 06 Mar 2024 08:00:00 ZChristopher Gannatti, CFA<![CDATA[<p>We recently had the opportunity to interview Charles-Henry Monchau, CIO at Syz Group, on our <em>Behind the Markets</em> podcast. Monchau believes the current geopolitical dynamics—combined with unique <a href="/blog/glossary#inflation">inflation</a> <a href="/blog/glossary#risk">risks</a>—will cause a shift in paradigm. Here are some highlights of the discussion:</p> <p><strong>The New FAANGs</strong></p> <p>Monchau argues the tech sector, which dominated in the last decade, may face new competition from sectors better suited for the changing macroeconomic and geopolitical environment. He proposes to repurpose the acronym “FAANG” for the newly favorable sectors:</p> <ul> <li><strong>F</strong>uel: as much as would like to use less, the world relies a lot on fuel, and Monchau advocates for pragmatism in the energy transition</li> </ul> <ul> <li><strong>A</strong>erospace and defense: rising conflicts will require more investment</li> </ul> <ul> <li><strong>A</strong>griculture: there are large needs and scare food resources in many parts of the world</li> </ul> <ul> <li><strong>N</strong>uclear and renewables: the energy demands from Europe and sustainable de-carbonization initiatives highlight the importance of nuclear</li> </ul> <ul> <li><strong>G</strong>old and minerals: too much debt can cause a debasement of the dollar versus gold and bitcoin, while the energy transition will support other metals</li> </ul> <p><strong>The Risks of Inflation and Currency <a href="/blog/glossary#devaluation">Devaluation</a></strong></p> <p>Monchau warns inflation may be higher for longer as the world becomes more dangerous and countries invest more in reshoring, rearming and building resilience.</p> <p>He also suggests the U.S. dollar may lose its status as the dominant reserve currency, as emerging markets seek to emancipate themselves from the petrodollar system. He sees gold, bitcoin and the Swiss franc as potential stores of value in this scenario.</p> <p><strong>The Challenges and Opportunities for Europe</strong></p> <p>Monchau expresses concern Europe may be deindustrializing instead of reindustrializing, as it focuses too much on sustainability without considering the economic realities of these decisions. Europe is highly dependent on energy imports, especially from Russia. Its auto industry is lagging in the electric vehicle transition. Europe still has some competitive advantages in the luxury, pharma and aerospace sectors, but many of these are exporters and not reliant on the strength of the European economy for their growth and success.</p> <p><strong>The Winners and Losers of the New Decade</strong></p> <p>Monchau expects the U.S. to remain strong, thanks to its energy independence, industrial revival and technological leadership. He also sees potential in some emerging markets, such as India and Mexico, based on favorable demographics, growth prospects and geopolitical alignments—particularly with friend-shoring or nearshoring trends.</p> <p>On the other hand, he is pessimistic about China, which faces slowing growth, rising debt and increasing tensions with the U.S. and its neighbors.</p> <p><strong>Consequences for Potential Asset Allocation</strong></p> <p>Monchau gives some practical advice on how to position one's portfolio for the new decade. He suggests increasing exposure to the new FAANG sectors, as well as to gold and bitcoin. He advises reducing allocations to fixed income, especially long-term bonds, as they are vulnerable to rising inflation. Further, the rising <a href="/blog/glossary#correlation">correlation</a> between stocks and bonds is a primary new risk that he does not see fading any time in the near future. <a href="/blog/glossary#alternative">Alternatives</a> and <a href="/blog/glossary#commodity">commodities</a> play an increasing role in this new world.</p> <p>This was a fantastic conversation—to listen to the full podcast, click <a rel="noopener noreferrer" href="https://open.spotify.com/episode/56mg3vKHrWD6J7geunfamV?si=atl52I5BSNC3Gbt4LxVJAA" target="_blank">here</a> or listen below.</p> <p> </p> <p> <iframe style="border-radius:12px;" src="https://open.spotify.com/embed/episode/56mg3vKHrWD6J7geunfamV?utm_source=generator" width="100%" height="152" frameborder="0" allow="autoplay; clipboard-write; encrypted-media; fullscreen; picture-in-picture" loading="lazy"></iframe> </p>]]>{6EF2A3BD-ED9D-46F5-A4FB-D6AB54361859}https://www.wisdomtree.com/investments/blog/2024/03/06/is-the-fed-going-to-party-like-its-1995Fixed IncomeNew Rate RegimeU.S. TreasuriesIs the Fed Going to Party Like It’s 1995?One of the more noteworthy stories for the money and bond markets thus far in 2024 is the changing perception of the Fed policy outlook. With rate cut&#8230;Wed, 06 Mar 2024 07:00:00 ZKevin Flanagan<![CDATA[<p>One of the more noteworthy stories for the money and <a href="/blog/glossary market#Bond">bond markets</a> thus far in 2024 is the changing perception of the Fed policy outlook. With rate cuts now being the primary focus, the conversation has revolved around when such a move could occur and what the path would ultimately look like. While <a href="/blog/glossary Reserve#Federal">Fed</a> officials continue to acknowledge that <a href="/blog/glossary cut#rate">rate cuts</a> seem likely later this year, a more recent development in the news was the comparison to the rate cutting cycle that occurred in 1995/1996. Against this backdrop, I thought it would be interesting to provide the reader with some context and outline what Fed policy looked like nearly 30 years ago.</p> <p>Before we look at the 1995/1996 experience, it is natural to ask why I am even bothering to blog on something that occurred almost three decades ago. Does it really have any relevance to 2024? Well, the reason is quite simple. The Fed has seemingly been united in its recent messaging that monetary policy, aka rate cuts, this year can be “methodical,” “cautious,” and “patient,” but Vice Chair Jefferson recently introduced a new aspect to the discussion when he mentioned the mid-1990’s rate cutting episode might be the best parallel to the current situation. Specifically, that policy easing occurred due to lowering inflation, not economic weakness, i.e., a soft landing.  </p> <p><strong>Fed Funds Target Mid Point of Range</strong></p> <p><strong><img src="https://www.wisdomtree.com/investments/-/media/us-media-files/blog/blog-images-2/2024/march/is-the-fed-going-to-party-like-its-1995/figure-1_fed-funds-target-mid-point-range.png" style="height:342px; width:603px;" alt="Figure 1_Fed Funds Target Mid Point Range" /></strong></p> <p>OK, so what happened in the mid-1990s? First up, the Fed embarked on an aggressive tightening cycle in 1994/1995. Indeed, the policy maker raised the Fed Funds target by 300 basis points (bps), with the rate hikes ultimately reaching a peak of 6%. Interestingly, the rate hike intervals themselves somewhat resembled the episode that recently transpired, as 25-bp increases at the start of the 1994/1995 cycle shifted into higher gears of 50-bp and then 75-bp moves—sound familiar?</p> <p>By mid-1995, the Fed had embarked on a rate cut policy. However, as highlighted by the above graph, the decline in the Fed Funds target was not uniform in any fashion. The first 25-bp decrease came in July of that year, but the next quarter-point move didn’t occur until five months later in December. The final rate cut in this easing cycle came in late January 1996, another 25-bp move, which took the Fed Funds Rate down to 5.25%. To sum it up, the 1995/1996 rate cut episode consisted of only three decreases worth 75 bps in total. </p> <p>Presently, as we’ve discussed over the last few months, the market has finally “come to the Fed” with respect to rate cut expectations for 2024. In other words, as February came to a close, implied probabilities for Fed Funds Futures saw only three rate cuts this year, just like the Fed’s latest dot-plot. Remember, we came into this year with the market pricing in six rate cuts. </p> <p><strong>Conclusion</strong></p> <p>If you want some further interesting context, the 2019/pre-COVID-19 rate cut cycle also consisted of only three rate cuts, and it also began in July, like in 1995. By the way, this was another non-recession-induced rate cut timeframe as well. Now, I’m not saying this is going to be the template for this year, but you have to admit these are interesting little monetary policy tidbits. The bottom line is that any potential rate cuts for 2024 are going to be data-dependent, and thus far, the soft-landing scenario has been aligning with what occurred nearly 30 years ago. Does that mean that three rate cuts beginning at this year’s July FOMC meeting should be a given? Stay tuned…</p>]]>{2D5A0D9D-1C04-4E4E-B748-6D37B00F82BB}https://www.wisdomtree.com/investments/blog/2024/03/04/nvidia-we-are-watching-historyArtificial IntelligenceMegatrendsNvidia: We Are Watching History Nvidia’s earnings report brought much intrigue. Consider this headline from the Financial Times: “Nvidia Is Nuts, When’s the Crash?”1 The results over&#8230;Mon, 04 Mar 2024 07:30:00 ZChristopher Gannatti, CFA<![CDATA[<p>Nvidia’s earnings report brought much intrigue. Consider this headline from the <em>Financial Times</em>:</p> <p>“Nvidia Is Nuts, When’s the Crash?”<sup>1</sup></p> <p>The results over the past year have been amazing, yes, but there are no precedents for a company growing from a market capitalization below a $1 trillion to $2 trillion in less than a year.<span style="font-size: 13px;"><sup>1</sup></span></p> <p>Does the hype match reality?</p> <p>The CURRENT share price is not necessarily a reflection the past, but rather a view on the FUTURE. One analyst believes Nvidia’s current valuation would be well supported IF the company can grow their current revenues tenfold and do so with an operating margin around 55% over the coming 10 years.</p> <p>We cannot know today if that will happen, but note the entire <a href="/blog/glossary#semiconductor">semiconductor</a> market—meaning all sales of all semiconductors, not just <a href="/blog/glossary#artificial-intelligence">AI</a> accelerators—has been $500–$600 billion in recent years.<sup>3</sup></p> <p>Continued execution on an exponential growth thesis, while not impossible, is a very high hurdle to clear.</p> <p><strong>What Does a 10-Times Revenue Jump Look Like?</strong></p> <p>Nvidia has been a public company for a long time—it went public in 1999 at $12 per share.<span style="font-size: 13px;"><sup>1</sup></span> Before the extreme feelings of FOMO (fear of missing out) kick in, remember the role of graphics processing units (GPUs) in artificial intelligence applications did not hit the mainstream until the so-called “AlexNet” moment in 2012.<sup>5</sup></p> <p>This means that we can look at Nvidia’s revenues, year by year, for quite a long time in figure 1.</p> <ul> <li>Each year is specifying the revenue figure in the 10-K, so 2013 represents Nvidia’s revenues for the 12 months leading up to January 31, 2013, as reported in the 2013 10-K. The whole company earned $4.28 billion in revenues during that period, and then during the 12 months leading up to January 31, 2024, the whole company earned $60.92 billion: more than a simple 10 times increase. We also see exponential shape to the growth.</li> </ul> <ul> <li>While the total revenue on the income statement is a standardized accounting field, companies have the flexibility to denote different sources of that revenue based on the stories that they want to portray related to their business. Over time, the way these categorizations are made can change. We found that Nvidia denoted a “Compute and Networking” segment of revenues from 2021 onwards. This segment is comprised of Nvidia’s Data Center accelerated computing platforms and end-to-end networking platforms. The focus on Nvidia in 2024 lies in the demand for its AI accelerator chips for data centers, so there is value in looking at this particular segment of revenues.</li> </ul> <p><strong>Figure 1: Nvidia’s Annual Revenues over Time</strong></p> <p> <img alt="" src="https://www.wisdomtree.com/investments/-/media/us-media-files/blog/blog-images-2/2024/march/nvidia-we-are-watching-history/figure-1.jpg" style="height:436px; width:736px;" /></p> <p><strong>What about Earnings?</strong></p> <p>Now, revenues are not profits. However, the growth story of Nvidia’s net income is even more impressive than the revenue growth component, as we see in figure 2:</p> <ul> <li>For the 12 months to January 31, 2013, we see Nvidia’s net income was $563 million. For the 12 months leading up to January 31, 2024, we see this figure jumped to almost $30 billion.</li> </ul> <ul> <li>Most of this growth, by far, was again based on being well positioned for the massive, unprecedented build-out of compute infrastructure kicked off by ChatGPT and generative AI. In the 12 months to January 31, 2023, net income was roughly $4.4 billion—significant growth from $563 million, but nothing close to the near $30 billion seen over the next year.</li> </ul> <p><strong>Figure 2: Nvidia’s Profits over Time</strong></p> <p> <img alt="" src="https://www.wisdomtree.com/investments/-/media/us-media-files/blog/blog-images-2/2024/march/nvidia-we-are-watching-history/figure-2.jpg" style="height:434px; width:740px;" /></p> <p><strong>Who Are Nvidia’s Customers?</strong></p> <p>The Nvidia A100, H100 and soon B100 AI accelerator chips are really systems and not chips that individuals would buy. The value lies more in building a network of these systems—usually thousands or tens of thousands of them—versus just buying a couple. Meta Platforms CEO Mark Zuckerberg indicated Meta would, by the end of 2024, have 350,000 Nvidia H100s—which could represent $9 billion.<span style="font-size: 13px;"><sup>5</sup></span> That does not feel like type of regular purchase, but we shall see.</p> <p>The <a href="/blog/glossary#magnificent-7">Magnificent 7</a>, excluding Nvidia (the so-called Mag 6) represent a large chunk of the customers that are currently spending the money to support Nvidia’s ongoing, blockbuster results.</p> <p>Microsoft, Amazon.com and Alphabet are running the world’s three largest public cloud infrastructure platforms. If the customers want to train and run models on Nvidia chips, these firms need to buy Nvidia chips. If one provider slows down, it creates an opportunity at the others.</p> <p>The Mag 6 have been increasing their capital expenditures. If we compare the level of reported capital expenditures at these firms and the overall level of revenues that Nvidia has reported, blunt analysis indicates almost 40% of the total capex could be represented by Nvidia’s revenues. We do not know what each of these companies is spending at Nvidia, although anecdotal evidence abounds that companies need to keep ordering from Nvidia for risk of being shut out of future production runs if they slow down.</p> <p><strong>Figure 3: A Significant Amount of Nvidia’s Revenue Could Be Mag 6 Capex</strong></p> <img alt="" src="https://www.wisdomtree.com/investments/-/media/us-media-files/blog/blog-images-2/2024/march/nvidia-we-are-watching-history/figure-3.jpg" style="height:530px; width:748px;" />  <p><strong>Conclusion: Megatrends & the Power Law </strong></p> <p>Nvidia’s results are so remarkable that it is difficult for any company to compare. When considering thematic investments, similar to venture capital, there can be a power law at work, in which, instead of all companies delivering a result close to average, we should likely see a small number of firms delivering astronomical results and other companies with terrible results. Fortunately, the astronomical results can cancel out the terrible results over time.  </p> <p>For strategies focused on AI, Nvidia is clearly an essential company but the success will not move forward based on a single company. The semiconductor value chain is complex, and we advocate thinking about the relationships exemplified within it—for instance, the fact that Taiwan Semiconductor Manufacturing Co. (TSMC) is fabricating Nvidia’s advanced chips. Nvidia is not, currently, making the physical chips.  </p> <p>When considering different AI strategies, we note that it is more important to look under the hood and simply understand—what is the Nvidia exposure? What is the Magnificent 7 exposure? There are not correct and incorrect answers, but it’s important to make sure the degree of exposure to these different kinds of things is monitored over time and fits the view the investor is looking to implement. </p> <p> </p> <p> </p> <p><sup>1</sup> Dan McCrum, “Nvidia Is Nuts, When’s the Crash?” <em>Financial Times</em>, 2/16/24. <br /> <sup>2</sup> Nvidia’s market cap on 2/18/23 was roughly $532 billion, while on 2/2/24 it was around $1.9 trillion. Source: <a rel="noopener noreferrer" href="https://companiesmarketcap.com/nvidia/marketcap/" target="_blank">https://companiesmarketcap.com/nvidia/marketcap/</a> <br /> <sup>3</sup> Source: “Investor FAQs,” Nvidia.com. <a rel="noopener noreferrer" href="https://investor.nvidia.com/investor-resources/faqs/default.aspx#:~:text=back%20to%20top-,When%20was%20NVIDIA's%20initial%20public%20offering%20and%20what%20was%20the,%2C%201999%20at%20%2412%2Fshare.#:~:text=back%20to%20top-,When%20was%20NVIDIA's%20initial%20public%20offering%20and%20what%20was%20the,%2C%201999%20at%20%2412%2Fshare." target="_blank">https://investor.nvidia.com/investor-resources/faqs/default.aspx#:~:text=back%20to%20top-,When%20was%20NVIDIA's%20initial%20public%20offering%20and%20what%20was%20the,%2C%201999%20at%20%2412%2Fshare.</a><br /> <sup>4</sup> Source: “AlexNet and ImageNet: The Birth of Deep Learning,” Pinecone.io. <a rel="noopener noreferrer" href="https://www.pinecone.io/learn/series/image-search/imagenet/" target="_blank">https://www.pinecone.io/learn/series/image-search/imagenet/</a><br /> <sup>5</sup> Source: Asa Fitch, “Nvidia Hits $2 Trillion on Insatiable AI Chip Demand,” Wall Street Journal, 2/23/23.</p> <p> </p>]]>