With the Fed rate decision and Yellen’s testimony yesterday now in the rear view mirror, here we are refocusing back to center on the next corporate earnings season which kicks off in late July.
In scanning through some notable “Earnings” focused ETFs in the landscape, WisdomTree as a provider jumps out at us primarily since they were first to market essentially with several “Earnings” focused fundamentally based ETFs not only in the U.S. equity market but also in the international space. All of these funds have respectable asset levels, although what is interesting to us is that WisdomTree which was once known as the “Dividend and Earnings” ETF company to many, now has its largest concentration of assets within two internationally structured funds DXJ and DEM, with $10.4 billion and $3.9 billion respectively.
In any case, several of these U.S. equity “Earnings” based ETFs are in focus here as we approach corporate earnings season once again. EPS (WisdomTree Earnings 500 Index, Expense Ratio 0.28%) is always an interesting product to look at thanks to the way it is structured in examining “positive cumulative earnings in the most recent four fiscal quarters” of the component stocks, which are the 500 largest companies ranked by market capitalization.
Currently, the weightings look like the following, AAPL (4.27%), XOM (3.65%), MSFT (2.53%), WFC (2.36%), and JPM (2.28%). One could compare this list head to head with the market cap weighted S&P 500 Index and related proxy ETFs and see that the top three members fall in the same order (AAPL 3.28% weighting, XOM 2.53%, and MSFT 1.80%) so some might make a case that the stock prices are backed by strong fundamentals in the form of real earnings.
As we go further down the line in index holdings in the S&P 500 versus the Earnings 500 Index, we see more deviation in weightings and names. Theoretically this would make sense if one believes that the smaller the capitalization of a stock is, the more “inefficient” it should be in terms of its valuation at all times.
EPS at this point in time has demonstrated remarkable correlation with the returns of the S&P 500 since inception, edging it out since the inception of EPS in 2007 by approximately 250 basis points before expenses. From a five year trailing, one year, and year to date perspective, as we mentioned there is a high level of correlation at least in the raw data that exists since this product started trading as an ETF in terms of performance.
EPS has approximately $105 million in AUM, which is well off of its peak asset level from several years back. Interestingly, the Mid Cap Earnings focused strategy, EZM (WisdomTree Midcap Earnings, Expense Ratio 0.38%) has about $566 million in AUM, and the Small Cap one, EES (WisdomTree Small Cap Earnings, Expense Ratio 0.38%) has about $450 million, perhaps lending some credence to the theory that smaller capitalization stocks tend not to trade as efficiently “with their earnings,” over time, as some companies may not even have earnings presently, for example, let alone a history of delivering earnings.