We think it’s interesting to consider blending WTLDI with mid-cap options in order to bring the weighted average size exposure into alignment with that of the S&P 500 Index, and the two mid-caps we use are the WisdomTree MidCap Earnings Index (WTMEI) and the WisdomTree MidCap Dividend Index (WTMDI).
The conclusion:
• An allocation of 77% WTLDI / 23% WTMEI achieved the same size factor as the S&P 500.
• An allocation of 64% WTLDI / 36% WTMDI achieved the same size factor as the S&P 500. WTMDI had a bigger size factor than WTMEI and thus more was necessary to lower the overall size factor to the S&P 500’s.
The WisdomTree Earnings 500 Index (WTEPS) also has more of a large-cap bias than the S&P 500, and we analyzed what combinations targeted the S&P 500 size factor. They are:
• 91% WTEPS / 9% WTMEI
• 85% WTEPS / 15% WTMDI
As people consider ways in which to potentially outperform the S&P 500 on a risk-adjusted basis, we believe that these are examples of one approach that could be of interest. It also shows that as one looks to add in the WisdomTree large-cap options, there is a large-cap bias to construction relative to the S&P 500 that could impact desired allocations in other segments.
To read our full factor analysis on our smart beta approach, click here.
Important Risks Related to this Article
Investments focusing on certain sectors and/or smaller companies increase their vulnerability to any single economic or regulatory development. This may result in greater share price volatility.
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