By design, market cap-weighted ETFs do the opposite.
Gradient uses WisdomTree Exchange Traded Funds as the backbone of its 401(k) platform (www.wisdomtree.com). WisdomTree uses a rules-based methodology to select and weight companies in its ETFs by a measure of fundamental value — instead of stock price alone. After researching all of the fundamental indicators of value, WisdomTree believes the most-effective metrics are cash dividends, or core earnings.
Each offers a compelling index approach for several reasons:
| Why Dividends? | |
| • | From 1926 through 2004, reinvestment of dividends accounted for 96% of the stock market’s total return after inflation* |
| • | Weighting by dividends can raise a portfolio’s dividend yield. Research shows that portfolios comprised of the highest dividend-yielding stocks within the S&P 500** Index have historically outperformed the S&P 500 Index as a whole. |
| • | Cash dividends provide an objective measure of a company’s value and profitability — one than cannot be manipulated |
| • | Potential bear market protection — as stock prices fall, investors can buy more shares with reinvested dividends |
| Why Earnings? | |
| • | Only profitable companies are eligible for inclusion. This helps screen for money-losing and speculative companies, both of which can make an index more volatile. |
| • | Weighting by earnings can lower a portfolio’s overall P/E Ratio1. Research shows that portfolios comprised of low P/E stocks within the S&P 500 Index have historically outperformed the S&P 500 Index as a whole* |
| • | WisdomTree Earnings ETFs utilize S&P "core earnings2" to help eliminate one-time earnings events and other distortions |
| • | With fundamentally weighted ETFs, WisdomTree believes it’s developed a wiser approach to ETFs that offers the potential for more profitable long-term investing — with less risk — than the capitalization-weighted options comprising 95% of today’s ETF market. |
* The Future for Investors, Jeremy Siegel 2006.
1. Price/Earnings Ratio (P/E Ratio) is a valuation ratio of a company’s current share price compared to its per-share earnings.
2. Core earnings is a standardized calculation developed by Standard & Poors designed to include expenses, incomes and activities that reflect the actual profitability of an enterprise’s ongoing operations.
** S&P 500 is maintained by the S&P Index Committee, a team of Standard & Poor’s economists and index analysts, who meet on a regular basis. The goal of the Index Committee is to ensure that the S&P 500 remains a leading indicator of U.S. equities, reflecting the risk and return characteristics of the broader large cap universe on an on–going basis. (Source: www.standardandpoors.com)