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WisdomTree launched its first ETFs in June of 2006, and is currently the industry's seventh largest ETF provider. WisdomTree sponsors 93 distinct ETFs that span asset classes and countries around the world. Categories include: U.S. and International Equity, Currency, Fixed Income and ... more

U.S. Quality Dividend Growth—2020 Reconstitution

Date: Tuesday, January 19, 2021 1:06 PM EDT

Across the globe, quality stocks were among the best performers in 2020, as companies with high profitability maintained an earnings edge despite Covid-19’s impact on the economy.

The WisdomTree U.S. Quality Dividend Growth Fund (DGRW), which seeks to track the WisdomTree U.S. Quality Dividend Growth Index (WTDGI), selects companies that look attractive according measures of profitability like return-on-equity (ROE) and return-on-assets (ROA), and earnings growth prospects, and weights them by their dividend stream.

This fundamental model has allowed WTDGI to garner exposure to dividend growers and stay away from companies at risk of cutting or suspending dividend payments.

The below table shows the 10 largest S&P 500 Index companies that cut or suspended dividends since WTDGI’s 2019 rebalance.

Excluding Schlumberger NV, which was not in WTDGI’s starting universe, these companies cut a total of $26.3 billion in dividends. WTDGI did not hold any of the companies in the top seven, and the impact to its dividend stream was only $5.4 billion.

Figure 1_dividends per share

WTDGI is rebalanced annually to reset exposure to these companies and adapt to changing economic conditions. Here are some of the major changes after its December reconstitution.

Fundamentals

WisdomTree recently implemented a new Composite Risk Screening in the reconstitution process that aims to mitigate exposure to the riskiest dividend payers across our broad Indexes. Because WTDGI already explicitly screens for quality, these additional metrics were more marginal but slightly improved the Index’s overall quality profile.

ROA improved from 6.61% to 7.20% and ROE improved over 100 basis points (bps), from 24.12% to 25.57%. Both of these significantly exceed metrics about the S&P 500 Index.

Along with improved quality metrics, the post-rebalance basket shows higher implied growth as measured by the earnings retention times the ROE. WTDGI also has 0.71% higher dividend yield than the S&P 500, with a 34% discount in forward valuation:

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