•More Weight to Lower-Priced Stocks – The WisdomTree MidCap Earnings Index has over 60% of its weight in the two lowest-priced quartiles, which is over 16% more weight than the S&P MidCap 400 or the Russell Midcap. There is a natural tendency of earnings-weighted approaches to reduce weight to stocks whose prices have appreciated at a faster rate than their earnings, and concurrently to increase weight to stocks that have fallen in price despite exhibiting positive earnings growth.
•Less Weight to Higher-Priced Stocks – WisdomTree’s 16% over-weight to lower-priced stocks comes from a 16% under-weight to the higher-priced segment of the mid-cap market. WisdomTree also has approximately 40% less weight to stocks that fall in the highest P/E ratio quartile than either of the market cap-weighted indexes.
•Negative Earnings and Speculative Stocks – Although profitability may fluctuate throughout the year, at each annual rebalance WisdomTree requires companies to be profitable before inclusion. This requirement limits the weight to firms we feel tend to be more speculative and lower quality at zero. Neither of the market cap-weighted indexes above shares this requirement.
1Sources: WisdomTree, Bloomberg, as of 7/17/14.
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.