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After more than a year of hype, Wisdom Tree Investments launched 20 new dividend-weighted ETFs on the NYSE on June 17, in a move that Wisdom Tree CEO Jonathan Steinberg said has the "potential to change the way investors think about indexing and investing." In a conference call announcing the deal, Wisdom Tree called traditional market-cap-weighted indexe s "flawed," and Wisdom Tree's dividend-weighted approach "a better way to index." Wisdom Tree's indexes (and the ETFs that track them) weight companies based on the size of their cash dividend stream, rather than their m a r ket capitalization. By targ e t i n g the dividend stream, Wisdom Tre e believes it can deliver between 100 and 500 basis points of excess annual returns to investors. Wisdom Tree is not the first company to launch a dividend-weighted ETF, of course. Barclays Global Investors (BGI) has that honor, thanks to its $6 billion iShares Dow Jones Select Dividend Fund (DVY), which launched in 2003. The Wisdom Tree filings differ from DVY in many ways, however, including their scope: They are a full suite of indexes designed to substantially replace Figure 1 traditional cap-weighted funds in an investor's portfolio. The funds include six domestic ETFs and 14 international ETFs. (Fig. 1) The Wisdom Tree weighting methodology differs from other dividend indexes in that it measures the cash value of the dividend stream, i.e., shares outstanding multiplied by cash dividend per share. Other dividend indexes focus on some variant of dividend yield, usually selecting only the highest-yielding components for inclusion. The end result is that the Wisdom Tree indexes are a bit more diversified than most dividend products, and have m o re of a large-cap tilt. The company believes that weighting by dividend stream will help keep the indexes investable by focusing exposure onto large-capnames. By contrast, indexes like the Dow Jones Select Dividend Index include many mid- and (sometimes) small-cap names, which may impact their investability as assets tied to the indexes gro w. (Note: The Wisdom Tree filings do include some yield-ranked funds: The "Top 100" funds select 100 large-cap companies with the highest yields in a given m a r ket segment, while the "High-Yielding" funds select the top 30 percent of companies by yield.) The biggest competition for these ETFs will come from other "fundamentally weighted" ETFs, such as the FTSE RAFI ETFs from PowerShares , which track Rob Arnott's " Fundamental Indexes." Those indexes weight components based on four factors-dividend yield, book value, revenues and free cash flow-and have the same goal as the Wisdom Tree funds: to outperf o r m the market by avoiding the excesses of market-cap-weighted indexes. Figure 1 One way that the Wisdom Tree and RAFI indexes differ significantly is in their sector weightings. For instance, the Wisdom Tree indexes have very little exposure to technology, as technology names rarely pay dividends. Under the RAFI methodology, companies that do not pay dividends simply have that score dropped?they are ranked based on the three other fundamental measures (book value, re venues and free cash flow). The result is a higher technology concentration. Even putting aside any extra performance from the dividend scheme, a number of the Wisdom Tree ETFs could become huge hits for investors. For instance, the international small-cap fund is the first of its kind in the U.S., as are the small-cap funds for Japan and Europe. Wisdom Tree deserves a great deal of credit for bucking the trend on rising expense ratios and setting its expenses at reasonable levels: 28-38 basis points for U.S. ETFs and 48-58 basis points for its overseas funds. |
