ETF Tuesday

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WisdomTree High-Yield ETF Stands Apart

Roger Nusbaum

WisdomTree, which has another 10 ETFs in the pipeline, has mountains of research providing evidence that dividend-paying stocks outperform the rest of the market over long periods of time.

Among WisdomTree's offerings were the first ETFs tracking foreign high-yielding equity funds. But one of the funds that caught my eye was the domestic-based WisdomTree High-Yielding Equity Fund (DHS Quote), or DHS.

The fund's holdings and concept are similar to the other large-cap dividend ETFs, including the iShares Dow Jones Select Dividend Index (DVY Quote) fund and the streetTRACKS SPDR Dividend (SDY Quote) ETF. But DHS's top-heavy weighting and sector makeup are big variables in evaluating the fund compared with the others.

The specific objective of the underlying WisdomTree index is to screen for dividend-paying stocks with market caps of at least $200 million and average daily dollar volume of $200,000. From there, the top 30% in terms of yield are included in the index. The prospectus says the companies are weighted based on their projected cash dividends as of the date the calculation is done.

DHS is loaded with mega-cap stocks like Bank of America (BAC Quote), at 6.8% of the fund, Citigroup (C Quote) at 6.4% and General Electric (GE Quote) with a 6.2% weighting. The top 10 actually accounts for 44.5% of the fund, which may draw some criticism considering that SDY has 28.1% of its weight in its top 10 and DVY has just 26%. The issue here, if there is one, is that having top holdings with 6% weights instead of 3% makes DHS more susceptible to single-stock risk.

For instance, bad news at Bank of America would have less of effect on the price of SDY and DVY, which weight the banking giant at 2.66% and 3.08%, respectively.

The sector makeup has a couple of extremes that are also important to note when evaluating the ETFs. The financial sector comprises 43% of DHS. This could be an issue if the yield curve stays inverted much longer, since lending money can be unprofitable with an inverted curve. DHS also has a very small weight in energy, at 3.4%. Obviously, energy has been a big driver in the market and may continue to provide leadership.

WisdomTree's ETF is a yield-based product, and it delivers on that score with a 4.02% yield (this is for the index; the fund has yet to pay its first dividend). That compares very favorably with SDY's 2.77% and DVY's 3.46%.

WisdomTree compares DHS to the Russell 1000 Value index. For 10 years, DHS's underlying index beats Russell 1000 Value by approximately 3% annualized and by slightly more than 2% annualized for five years. DHS lags for the last three- and one-year time periods.

While the history of any changes was not available from the WisdomTree Web site, based on the current allocation, I might attribute the recent lag to its underweight position in energy. For comparison sake, the S&P 500 has 10% in energy and the Russell 1000 Value has 14% in energy.

DHS has more than 400 holdings, compared to 100 for DVY and 50 for SDY. This means that DVY and SDY have much larger cap sizes, close to $40 billion each. But the DHS, despite being so top-heavy, has a median cap size of only $1.5 billion. I should note I was surprised by the $1.5 billion figure, but confirmed it with the company.

Overall, I'm curious to see if DHS tracks closer to the large-cap or small-cap benchmarks over time.