Editor's Note: In this edition of "360 Degrees,"
(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
, 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
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
, 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
. 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.
I don't think the higher volatility numbers will persist. There may be some distortions due to the very thin trading volume.
In assembling a diversified portfolio, having some holdings with the characteristics of dividend-paying stocks makes sense, but I would beware of too much of a good thing. Despite WisdomTree's claim that back testing shows its method outperforms over time, I don't think that betting that dividend weighting will outperform everything else all the time is prudent. While I do want some dividend payers, I also want some holdings that offer the chance for explosive growth. Diversification is blending the two together: dividend payers and fast growers.
Currently WisdomTree is in the process of trying to register 10 sector ETFs and I get the feeling there will be more. Many do-it-yourselfers benefit from relatively predictable, higher-yielding holdings that do not require stock-picking skills. I believe more choice in this area is unambiguously positive.
Why Pay 2 and 20? by James AltucherOriginally published in Columnist Conversation on Sept. 5 at 8:06 a.m. EDT
I have yet to see a financial product launch as impressive as the launch of WisdomTree's family of actively managed ETFs. Basically, using research from the likes of Wharton professor Jeremy Siegel, WisdomTree has launched ETFs that they feel will outperform the standard ETFs and indices.
While it's still unclear whether or not the premise will hold true for these ETFs (they just launched in June. We will have to wait years to really determine if the strategies are successful), the company has gone all-out in attracting big-name talent to join management and the board, such as hedge fund heavy hitter Michael Steinhardt, Siegel and ex-SEC Chairman Arthur Levitt.
On the one hand, I think WisdomTree is signifying a very broad trend which will last for years and transform the financial industry: People don't need to fork over 2 and 20 fees for hedge funds that are returning LIBOR minus fees. Nor do they need to pay 5% front-end loads plus marketing expenses for high-profile mutual funds. My guess is we will start seeing some of the $10 trillion in mutual funds and hedge funds start to move toward these ETFs, which will inspire other companies to start competitors to WisdomTree.
At a $400 million market cap, it's hard to tell if the pink sheet-listed company is a good or bad investment. If its ETFs can raise $10 billion in the next few years, then certainly an investment today will be considered getting in cheap. The bet is the right bet, but it's still up in the air if WisdomTree is the right horse. That said, I'm impressed with the idea, the marketing and the management, and I plan on taking a further look at the company.
The Game Passes Vanguard By, by Chip Hanlon
In 1896, Stephen Paget, a leading medical expert and author of the then-authoritative
The Surgery of the Chest
, famously commented, "Surgery of the heart has probably reached the limits set by Nature to all surgery. No method and no new discovery can overcome the natural difficulties that attend a wound of the heart."
To me, John Bogle and Burton Malkiel recently wrote the investment industry's rough equivalent in a
Wall Street Journal
. As the founder of the Vanguard Group, Bogle's legacy in this industry is no doubt secure, but his and Malkiel's central assertion in that essay -- that today's cap-weighted indices cannot be improved upon -- gives that uncomfortable feeling of watching the once-great football coach whom the game has quietly passed by.
My broad take on ETFs is that they remain in their infancy.
have traded since 1993, but
didn't make their debut until 1998 and the
Nasdaq 100 Trust
not until a year later. It was only then that the light bulb turned on in heads on Wall Street: Why don't we create ETFs based on narrower indices? Readers might be surprised to recall, for example, that the popular
Oil Service HOLDRs
didn't begin trading until 2001.
And most of today's ETFs are younger still.
In a recent article, I made the case that
actively managed ETFs are likely in our future. For now, though, they're still strictly index-based, so doesn't it make sense that our industry would re-examine exactly how indices are built in the first place and whether that process can be improved upon?
Why would one assume that no advances can be made? And if improvements are possible, why doesn't fundamental indexation mark a logical place to start? Certainly, the impressive track records of the people involved at WisdomTree -- including Steinhardt, Siegel and Frank Salerno -- suggest they should at least be given the benefit of the doubt. And countless academic studies that prove the importance of dividends in a portfolio's total return suggest WisdomTree's dividend-based focus makes terrific sense.
Bogle and Malkiel claim that ETFs based on fundamental indexation will result in higher expense ratios. WisdomTree's ETF products have fees ranging from 0.28% to 0.58%; the difference with cap-weighted ETFs is so small as to be inconsequential, particularly if WisdomTree has indeed built a better mousetrap.
Their warning that trading fees will be higher is certainly a red herring, as decimal pricing and lower trading costs have completely diminished such "portfolio drag" from what it used to be -- just ask any institutional broker on Wall Street to compare what he's getting paid per trade today versus a decade ago.
Bogle and Malkiel also rail about higher portfolio turnover and the higher taxes that may result. It's true that WisdomTree's large-cap products can be expected to have slightly higher turnover (though it's not at all certain this will translate into higher capital gains), but its small-cap products likely won't because the indices they're benchmarked against, such as the Russell 2000, already have high turnover themselves.
Obviously, heart surgery has improved since 1896, and it will continue to evolve. Likewise, we're likely at the beginning, not the end, of improvements in index creation and exchange-traded funds.
If Bogle's article indicates that his firm intends to stick only to its traditional cap-weighted indices and ETFs, Vanguard certainly won't be put out of business when a better index-building methodology is established. He can expect, however, to watch as some new ETF provider becomes the Vanguard of tomorrow.
James Altucher is a managing partner at Formula Capital, an alternative asset management firm that runs several quantitative-based hedge funds as well as a fund of hedge funds.
Charles P. Hanlon focuses on non-dollar investments. He is currently the president of Delta Global Advisors.
Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, Ariz., and the author of Random Roger's Big Picture Blog.