Scalper1 News
Summary This is the second in my series of articles examining the field of large-cap ETFs. WisdomTree Investments’ ETFs are distinguished by their proprietary indices which are nuanced to fit specific aims. I describe the general nature of WisdomTree’s four large-cap ETFs, providing detailed information about the performance of these funds. WisdomTree Investments, Inc. (NASDAQ: WETF ) issues four large-cap ETFs under the WisdomTree Trust header: WisdomTree LargeCap Dividend Fund (NYSEARCA: DLN ) 1 WisdomTree ex-Financials Fund (NYSEARCA: DTN ) 2 WisdomTree Earnings 500 Fund (NYSEARCA: EPS ) 3 WisdomTree LargeCap Value Fund (NYSEARCA: EZY ) 4 What sets these funds apart from other large-cap ETFs are their indices; WisdomTree manages its own, proprietary, indices, assuring the funds of guidelines relevant to their purposes and hopefully structured to maximize the funds’ values. The ETFs All four funds require holdings to have a minimum of $100 million in market capitalization. 5 DLN and DTN take their holdings from the 300 largest companies in the WisdomTree Dividend Index that have paid dividends for the 12 months prior to screening; the two funds also require a $100,000 daily trading volume (average for the three months preceding screening). 6 EPS and EZY are drawn from larger universes of large-cap companies ( 500 and 1 , 000 , respectively), and both require a $200,000 daily trading average for the six months – and a price-to-earnings ratio of at least 2 – preceding screening. Eligibility for the index is determined by earnings over the four quarters preceding screening. The funds differ in two important respects: 1) specific eligibility criteria per index; 2) weighting. One thing I like very much about these funds is that their eligibility criteria are precise, even if I do not always find the criteria to be what I would like to see, but that’s my issue. The weighting systems speak directly to the focus of each fund – they do not simply go to the “default” cap-weighted system or to some other quick and easy but essentially meaningless measure. I will describe the general nature of the weighting systems as I describe each fund. 7 The average market cap in this fund is $49.5 billion, and Apple Inc. (NASDAQ: AAPL ) is the most-weighted holding in the fund. The holdings are weighted according to the company’s projected dividends for the coming year, with weighting determined by dividing a holding’s dividend by the aggregate dividends paid by all holdings – the company that pays the most cash gets the greater weight. DLN ‘s yield of 2.76% does exceed the average yield for the S&P 500 , but there should be no illusion that this is a fund that pays large dividends; all the same, just shy of $2.00 per share is very nice, and it is likely to be a steady (and steadily growing ) dividend. Expenses reported in the most recent Annual Report were a little higher than the expense ratio would indicate, and this may account for the somewhat low distribution ratio. During the most recent fiscal year the fund’s turnover rate was 12% of its average portfolio value; the larger a fund’s turnover rate, the more expenses the fund encounters. 8 DTN ‘s expense efficiency ratio (EER) of 77.40% tells a story here: the fund overran its expense ratio due to a very large turnover rate of 32% of the average value of its portfolio. 9 Nevertheless, DTN paid out a whopping yield of 3.49% ($2.45 per share). The eligibility criteria for DTN are the same as for DLN , except that DTN takes its holdings from the top-ten dividend-yielding companies in each sector except the financials. It strikes me as more effective to focus on yield rather than on cash dividends paid, as DLN does. Weighting is determined by dividing each holding’s yield by the sum of the yields of all holdings in the portfolio. This is a clever scheme, as the fund’s bias is towards those companies paying the highest yield – no doubt a substantial factor in supporting DTN ‘s excellent yield. DTN also has holdings in DLN and the WisdomTree MidCap Dividend Fund (NYSEARCA: DON ). 10 The EPS portfolio is comprised of large-cap companies chosen on the basis of their earnings ; to qualify, a company must have “generated positive cumulative earnings over their most recent four … quarters.” 11 The companies are among the 500 largest companies in the U.S., as determined by market cap. 12 Companies in the index are weighted according to their earnings in proportion to the aggregate earnings of all companies included in the portfolio. Earnings are computed using Standard & Poor’s -developed Core Earnings , which includes expenses, incomes and activities reflecting the profitability of a company’s ongoing operations. 13 EPS puts up rather nice figures: both its distribution ratio and expense efficiency rating are greater than 100%, indicating that it is minimizing its expenses and maximizing the distribution of net income. 14 Dividends, however, are a secondary concern here, as the fund is designed to hold companies that are most likely to maintain solid earnings and growth . These companies are (presumably) also likely to experience smaller losses during economic downturn. Besides the criteria mentioned at the beginning of this section, EZY holdings’ earnings per share, book value per share and sales per share must be positive . WisdomTree Investments creates a ” value score ” for each company based on EPS , BVS , sales-to-share and one-year change in stock price ; of the 1,000 largest-capped companies those with scores in the top 30% were selected for the index. 15 Weighting is based on earnings, which are computed on the basis of the companies’ adjusted net income. This is the smallest of the four large-cap WisdomTree funds and – after more than eight years on the market – it does not seem to be quite as virile as its brethren. Average daily volume is only $155K, just less than one-fifth the volume of next-in-line EPS. EZY’s holdings are not the sort to inspire a lot of confidence. A full 35% are in consumer goods, the bulk of that (22%) being consumer-discretionary industries. The following chart shows the breakdown of EZY’s portfolio: (click to enlarge) Comparative Performances The following chart shows the performances of the WisdomTree funds since their inceptions: (click to enlarge) Performance for the four funds since inception has been on the modest side, particularly if compared to the Guggenheim funds I examined in my last article. 16 In particular, the Guggenheim Russell Top 50 ETF (NYSEARCA: XLG ) had the lowest performance over this period of 55.77% – about 1100bps more than the highest-performing WisdomTree fund, DLN . The funds’ post-recession performance has been somewhat more impressive, but only marginally: (click to enlarge) While performance over the past five years has been better for these funds, the best two ( EPS and EZY ) only marginally outperform the worse of the five Guggenheims. 17 The Recession In the Guggenheim discussion I found it interesting to look at how those funds performed through the recession of 2007-2009. As I looked at the data for the WisdomTree funds, I began thinking more about the significance of a fund’s performance during the recession (and, as I discuss below, during the correction of 2015). I am formulating some thoughts about an ETF’s recession data and what it might say about the make-up of a fund; I will have more to say about this in the near future, as I collect more data. In the meantime, the following chart gives the specifics for the WisdomTree funds from 2007 through 2013: (click to enlarge) This chart traces the performance of the funds from their highest pre-recession point to their lowest recession point and then tracks how long it took each fund to reach or exceed the pre-recession high. It took two years or less for prices to collapse, but more than four years to recover. 18 Looking at the data above, it would seem that the funds based primarily on earnings and valuation seem to do a bit better than the funds focused on dividends . It will be interesting to see if this is a generalizable observation as the series continues. A curious note: EZY hit its recession low on November 20, 2008 – almost five months before the day the market as a whole bottomed. This drop seems to have been a “flash crash” of sorts, as EZY rose back up the next day, and then followed the rest of the market to the March 9 lows. It just happened that EZY ‘s November 20 low was lower than that of March 9. The WisdomTree funds compare fairly well with the S&P 500 during this period. The S&P dropped from a high of 1565.15 (October 9, 2007) to a low of 676.83 on March 9, 2009 – a drop of – 57.76% , just slightly less than the average drop for the WisdomTree funds. The 2015 “Correction” As with the 2007 – 2009 recession, the “correction” experienced in late summer, 2015, provides an opportunity to examine the nature of an ETF’s structure: (click to enlarge) There is less to go on here than was available with the recession, primarily because there has not been enough time to fully recover from the drop on August 25. However, some of the data does seem to correlate with data from the recession, with regard to the length of time from pre-correction high to correction low. During the recession, EPS suffered the least losses of the set, DLN was second, EZY third, and DTN lost the most value, at -65.11% . By August 25 (or, for EPS , September 29) EPS saw a decrease of nearly -13%, DLN was down -13.92% and DTN again dropped the most value – this time with -15.45%; the only change was with EZY , which dropped by only 10.38%. It is quite possible that, since EZY ‘s portfolio consisted of companies that presumably were experiencing suppressed valuations , that fund was less damaged by a market turn that would, in principle, have been motivated by (perceived) excess valuation. Compound Annual Growth Rate I am beginning to wonder if each group of large-cap funds will have in it a “sleeper” – a fund that seems unimpressive on the face of things, but which ends up doing quite well by itself. The following chart shows the total returns for each of the funds since inception and over the past five years: 19 (click to enlarge) Only one of the WisdomTree funds has performed consistently since inception – DLN . Since first being issued, DLN has returned 87.86% – perhaps not an “incredible” amount, but not bad. Over the past five years, its total return has been essentially the same – 88.36% . No matter whether one has held shares since inception, nine years ago, or only for the past five years, one has received 88% return on one’s investment. DTN has fared the worst, although “worst” is relative, here – DTN has offered the lowest return of the four funds over the past five years. Since inception, the fund has returned more than 102% , but over the past five years has returned 84.56% . EPS has returned only 70.13% since inception, but had an investor purchased shares five years ago, they would have seen a total return of 88.25% on their investment. With the recession behind it, this fund has started to come into its own. If any of the WisdomTree large-cap ETFs qualifies as a sleeper , however, it is EZY . Since inception, this fund has returned only 53.55% – I think that qualifies as fairly low. However, over the past five years, EZY has returned nearly 90% over its initial value in December, 2010. The following graph shows the CAGRs for the four funds over the two periods being considered: (click to enlarge) All things considered, these four funds have been fairly indistinct over the past five years. Assessment While EZY looks fairly intriguing when considered from the five-year perspective, when all is said and done, DTN pulls clearly ahead of the pack, with DLN and EPS not too far behind, in that order. EZY does not score well in many of my criteria, and ends up quite a distance in the back. If I were looking for dividend income , DTN would be high on my list (of the funds discussed here); if growth were the aim, I believe EPS would have to get the nod. All things considered, however, I would likely turn to the Guggenheim funds before I would choose one of the WisdomTree funds – at least, as it stands for now. Disclaimers This article is for informational use only. It is not intended as a recommendation or inducement to purchase or sell any financial instrument issued by or pertaining to any company or fund mentioned or described herein. All data contained herein is accurate to the best of my ability to ascertain, and is drawn from the Company’s Prospectus, Statement of Additional Information, and fact sheets. All tables, charts and graphs are produced by me using data acquired from pertinent documents; historical price data from Yahoo! Finance . Data from any other sources (if used) is cited as such. All opinions contained herein are mine unless otherwise indicated. The opinions of others that may be included are identified as such and do not necessarily reflect my own views. Before investing, readers are reminded that they are responsible for performing their own due diligence; they are also reminded that it is possible to lose part or all of their invested money. Please invest carefully. ——————————- 1 DLN homepage. 2 DTN homepage. 3 EPS homepage. 4 EZY homepage. 5 WisdomTree Trust Prospectu s , August 1, 2015. The $100 million figure is apparently generalized to take into account all of WisdomTree’s funds. In general, the large-cap funds seem to have holdings with capitalization of more than $1.6 billion each. 6 Prospectus , pp. 10 & 14. 7 The Prospectus for the funds goes into great detail in explaining how the weighting process is executed. 8 WisdomTree Trust Annual Report , March 31, 2015. Distribution ratio compares the actual distributions made to those that would be projected on the basis of net income as reported in the Annual Report. Some deviation may be expected, since my figures reflect yield ttm, which may extend beyond the period covered by the Annual Report. 9 See Prospectus (5, above), p. 10. 10 However, holdings in DLN and DON are small, at 0.03% each of DTN ‘s NAV. 11 Prospectus , p. 38 12 According to the WisdomTree Earnings Index . Prospectus , p. 38. 13 Prospectus , p. 39. 14 I calculate the “expense efficiency rating” by dividing actual expenses paid into the product of the fund’s NAV and its expense ratio. “Distribution ratio” is determined by dividing the actual dividends paid by net income per share. If a manager is keeping expenses down, and making large distributions, both figures represent results exceeding expectations. Any figure over 100% should be considered very favorable. 15 Prospectus , p. 50. 16 ” Changes Coming For Guggenheim Large-Cap ETFs .” Coincidentally, a chart for the Guggenheim funds is shown there covering essentially the same period as the one above – 2006 – present. 17 A five-year performance chart was not presented in the Guggenheim article, but has been made available here . 18 I can see why an investor might find it hard to hold onto stocks when going into a recession, since the recovery seems to be protracted (and, according to then-Treasury Secretary Tim Geithner, the recovery from this last recession was quicker than usual). Cutting one’s losses early, then re-investing once the bottom is neared, may seem to be an effective way to avoid extended losses. But the devil’s in the details: when is it “official” that the economy is entering a recession, and when has the economy bottomed out? I don’t think there are any hard and fast answers to either of those questions. 19 Share prices reflected in the graph have been adjusted to reflect dividend payments. Scalper1 News
Scalper1 News