In 2013, rising interest rates were a common topic of discussion, and we even started to see the initial stages of this phenomenon during the second half of the year.1 However, so far in 2014, the trajectory of interest rates in developed international markets has been downward.2
Connection between Interest Rates and Stock Performance
The current demographic reality in developed markets is one of aging populations. In investment terms, this means that there is a need for income, as more and more people will need to replace labor income with investment income. Traditionally, bonds have been the prime beneficiaries of this demand, but with the current low interest rates, bonds cannot shoulder the full burden.
People have looked to equities to fill the gap.
WisdomTree’s Top-Performing Broad Developed International Index
The top-performing broad developed international Index at WisdomTree for the year-to-date period ending July 15, 2014, was the WisdomTree International Dividend ex-Financials Index (WT Int. Div. ex-Financials). Why? We believe that this Index best answered the call for yield in these developed market regions. The following table illustrates the critical factors in play. As an important point of reference, we compare the WT Int. Div. Ex-Financials to the MSCI EAFE Index (EAFE). EAFE does not require constituents to be relatively higher-yielding dividend payers, but it is a broader, widely followed performance benchmark for developed international equities.
Connecting Dividend Yield to Equity Performance in 2014
• Approximately 50% Exposure to Defensive Sectors: We consider the defensive sectors to be Utilities, Telecommunication Services, Health Care and Consumer Staples. In both EAFE and WT Int. Div. Ex-Financials, Utilities and Telecommunication Services are among the highest-yielding sectors. A critical difference regards the weighting—in the WisdomTree Index, approximately 10% more weight was allocated to each of these sectors, as of July 15, 2014.
o Beyond that, we can call attention to the methodology behind WT Int. Div. Ex-Financials. On an annual basis3, outside of Financials, the 300 largest constituents from the WisdomTree DEFA Index are selected. From there, the 10 highest-yielding stocks from each of the remaining nine sectors are selected. These are weighted on the basis of their dividend yields. EAFE is simply weighted by a function of float-adjusted market capitalization. We believe that WisdomTree’s focus on yield is the critical factor behind this Index’s strong performance during this period.