2. The same level of earnings per share, and
3. Different share prices
In this hypothetical we can say that a market capitalization-weighted approach would give more weight to the firm with the higher price, as that firm would necessarily have the higher market capitalization. Since both firms also have the same earnings per share, this firm would also have the higher P/E ratio. On the other hand, an earnings-weighted approach would give an equal weight to both firms, which, in other words, means giving more weight to the firm with the lower P/E ratio relative to the market capitalization-weighted approach.
Result: WTEMCG Exhibited a Similar Valuation as MSCI EM (as of 8/31/2013)
For definitions of terms in the chart, please visit our Glossary.
• Similar Median P/E ratio to MSCI EM: WTEMCG exhibited a similar median P/E ratio of approximately 12x as the MSCI EM as of 8/31/2013. The Dow Jones Emerging Markets Consumer Titans 30 Index—an Index of 30 firms in the Consumer Discretionary and Consumer Staples sectors, weighted by market capitalization—exhibited a median P/E ratio of greater than 20x.
• PEGY Ratio Appears Attractive: Of the three indexes shown, WTEMCG exhibited the lowest PEGY ratio—a ratio that specifically denotes the level of the median P/E ratio of the Index relative to its median long-term earnings growth estimates. It is approximately half that of the Dow Jones Emerging Markets Consumer Titans 30 Index, due to the fact that WTEMCG has both a lower median P/E ratio and a higher level of median long-term earnings growth estimates.
Conclusion
Regardless of WTEMCG’s current valuation, the biggest ongoing benefit of the methodology, we believe, comes from the ongoing disciplined rebalancing process. From a selection standpoint, for constituents to maintain inclusion, higher earnings yields will be favored over lower earnings yields. From a weighting standpoint, qualifying firms whose price levels rise but whose earnings stay stable or decline will tend to see reductions in weight. At each annual rebalance, depending on the market environment, the natural focus of the Index will continue to be sensitive to valuation.
– See more at: http://www.wisdomtree.com/blog/index.php/incorporating-a-valuation-discipline-to-the-emerging-market-consumer-growth-theme/#sthash.zf793gqv.dpuf