360 Degrees of WisdomTree
Editor's Note: In this edition of "360 Degrees," RealMoney commentators evaluate WisdomTree Investments (OTC: WSDT). Almost four months after its fundamentally weighted ETFs began trading, how solid are the company's claims that it has found a better method of investing? And would buying shares in WisdomTree itself be a good investment?
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If you spend any time watching CNBC, you no doubt have seen the commercials for WisdomTree in which Wharton finance professor Jeremy Siegel declares that it has found a better way to construct indices using dividends rather than market cap to determine index components. It has back-tested the results and, he says, they are very impressive. Although its funds are only three and a half months old and it is too soon to draw strong conclusions, so far the results have indeed been pretty good. (Click here for information on the funds from WisdomTree's Web site.) Basically, its approach is to use dividends as a measure of corporate health. It contends that choosing stocks for indices based on this measure of fundamental strength produces better returns with less risk than standard cap-weighted indices, which it claims are distorted by inefficiencies in pricing, overweighting overvalued stocks and underweighting undervalued ones. How might these funds fit into your portfolio? I view them as potential replacements for other dividend ETFs that have been trading longer. Of the 20 WisdomTree ETFs, six invest in segments of the U.S. markets and the other 14 funds invest in foreign markets. All six of the domestic funds have outperformed the iShares Select Dividend Index Fund (DVY), the original and most actively traded dividend ETF, since their inception. The longest-standing foreign dividend ETF I am aware of is the PowerShares International Dividend Achievers Fund (PID). Ten out of the 14 foreign WisdomTree Funds have outperformed this ETF. Part of the equation here is volatility. Higher dividends are generally associated with less volatile stocks. I plugged all 20 of the funds into PortfolioScience.com to get a feel for the volatility and found that four of the six domestic ETFs are less volatile than the S&P 500, but all six were slightly more volatile than the benchmark iShares Select Dividend Index Fund. Much to my surprise, all 14 of the foreign ETFs have been more volatile than the S&P 500 and the PowerShares fund.
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