How Earnings Indexes Are Becoming Important Diversifiers

It is truly amazing that in nearly every client meeting we attend a resounding chorus of agreement sounds when discussing the success of high-dividend-yield and low-volatility strategies in 2016. But can their large outperformance continue? The answer will depend on what happens with interest rates. If they move higher, investors may look to parts of the market that have lower valuation multiples but are less interest rate sensitive. We recently described the rebalancing process that results in the WisdomTree Earnings Indexes having lower valuation multiples than the market.

• The WisdomTree MidCap Dividend Index was up 12.99%.
• The WisdomTree SmallCap Dividend Index was up 15.93%.

For those focused on overall portfolio strategies that seek relatively higher dividend-paying stocks, in our view, these strategies will remain great complements to large-cap positions, and it’s also worth noting that these Indexes will undergo their annual rebalance screening on November 30, 2016. Big outperforming constituents may not be able to hold onto their increased weights if they didn’t grow their dividends commensurately.

But a dividend focus is not the only way to consider smart beta approaches to mid- and small-cap stocks.
 
Our Mid- & Small-Cap Earnings Strategies Offer Intriguing Sector Complementarity to Dividends

What if, instead of focusing solely on dividend-paying constituents, an investor were to focus on mid- and small-cap stocks through the lens of profitability? WisdomTree does just that with its mid-cap and small-cap earnings strategies. In 2016:2
 
• The WisdomTree MidCap Earnings Index was up 10.20%.
• The WisdomTree SmallCap Earnings Index was up 12.61%.

These are strong numbers, but not quite as strong as the dividend strategies. Sector exposures shed light as to why.
 
What Sector Bets Are Introduced to Mid-Caps? Dividends vs. Earnings
 
Top 3 Over-Weight and Under-Weight Sectors of WT MidCap Dividend Index vs. S&P MidCap 400 Index, with WT MidCap Earnings Index also shown (as of 10/7/2016)
 

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