WisdomTree combines size and dividend smart beta factors in new ETF

Nov 16th, 2015 | By | Category: Equities

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WisdomTree, a leading global exchange-traded fund provider, has unveiled the WisdomTree Global SmallCap Dividend Fund (BATS: GSD). The fund tracks the performance of small-capitalisation, dividend-paying firms across developed and emerging markets.

WisdomTree combines size and dividend smart beta factors in new ETF launch

Jeremy Schwartz, WisdomTree Director of Research.

Jeremy Schwartz, WisdomTree Director of Research, commented: “Small-caps are a compelling asset class because they are typically the most sensitive to incremental changes in economic growth expectations—particularly in the region or country, in which they’re located. GSD offers investors the opportunity to access a broad cross-section of global small-cap, dividend-paying companies with the potential to capture a higher level of income.”

The theory surrounding small-cap investing is rooted in research conducted by Fama and French in 1970. The pair investigated the sources of return behind individual stock performance, examining the roles of the market return, a size factor, and a value factor. The paper suggested that investors could earn superior risk-adjusted returns when compared to a broad market portfolio by tilting towards size and value factors.

According to WisdomTree research, the small-cap premium has been estimated at 1.9% per annum over the past 20 years; the study compared the returns on the MSCI ACWI Small-Cap Index to the returns on the MSCI ACWI Large-Cap Index.

Although small-cap firms have historically been seen to outperform the market, the investment style may exhibit increased volatility compared to a broad market cap-based portfolio. Smaller firms may be considered riskier investments due to characteristics such as less established business lines, undiversified business operations, and more restrictive access to capital. Downturns in the market may therefore have a pronounced effect on these stocks.

Dividend-paying firms offer investors an attractive means of earning a regular income. By combing small-cap and dividend tilts, WisdomTree proposes the fund offers regular income while also maintaining growth potential.

Schwartz added, “When investors think of dividends, they tend to think of mature, large-cap companies, and as a result, they may wrongly overlook small-cap equities as a potential for income. However, many small-cap companies have proven business models with relatively stable earnings, and have the ability to pay out dividends to shareholders and grow them over time.”

The methodology behind the WisdomTree Global SmallCap Dividend Index follows a rules-based process to select global stocks exhibiting relevant size and dividend characteristics while maintaining liquidity and diversification.

The first step in the process involves applying minimum liquidity and market cap screens, the latter to ensure the fund maintains a small-cap exposure rather than a micro-cap exposure. The second step involves selecting the 1,000 largest small-cap firms that rank within the bottom 5% of the WisdomTree Global Dividend Index by market capitalisation. Each constituent is initially weighted according to their dividend stream (the US dollar value of a firm’s annual gross dividend per share multiplied by the number of common shares outstanding) relative to the combined dividend stream of all selected stocks.

The weights of constituents may be adjusted further to maintain regional diversity as well as ensure no sector exceeds a maximum weighting of 25%. The index is reviewed on an annual basis.

As of the 13 November 2015, the WisdomTree Global SmallCap Dividend Fund had major country allocations within the United States (48.7%), Japan (10.9%), the United Kingdom (5.8%), Canada (5.3%) and Australia (4.0%). The fund was leaning towards the financials (26.4%), industrials (20.0%), consumer discretionary (15.4%), materials (9.2%) and information technology (7.8%) sectors. There were 491 holdings within the fund of which no single weighting exceeded 0.9%. There is a total expense ratio of 0.43%.

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