Weighting by Earnings Focuses on Lower P/E Ratios
Given how low-priced stocks contributed to the performance, let’s discuss how the Index continually focuses on this segment of the Indian market at each annual rebalance. In order to garner significant weights in the Index, the index methodology requires that a company grow its profits rather than increase its market capitalization. As a result, we can generalize the impact of the rebalance as follows:
• Typical Additions in Weight – Firms whose share prices may have performed poorly or stayed flat but whose earnings increased.
• Typical Reductions in Weight – Firms whose share prices may have performed quite well but whose earnings growth was negative or flat.
This rebalancing process is a key differentiating element of WisdomTree’s indexing approach and one that WisdomTree believes will continue to provide value over time.
Conclusion
The landslide victory by Narendra Modi and his party in the Indian prime minister election has garnered much attention and celebration in equities. A concern with such large gains in a short period is that the market may become expensive. WisdomTree’s earnings-weighted approach helps to focus on lower-priced segments of the Indian market, and the Index rebalances each September to help manage the valuation risk from the big winners. For those looking for continued improvement in India, EPI — which can be considered a broad representative of the Indian market and economy, but also employs a process to manage equity valuation risk — could be an attractive way to gain exposure to India.
Important Risks Related to this Article
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