The term smart beta is becoming more and more popular in describing indexes that, in short, diverge from a typical market capitalization-weighted approach. With such indexes, we believe that it is critical to understand the different tilts and biases introduced by the stock selection and constituent weighting rules of each index. Today, we’re taking a deeper look into our broad-based international smart beta indexes and examining how our smart beta (aka fundamentally weighted) approach has performed internationally. Specifically:
• Did these indexes tend to increase or decrease sensitivity to movements of the market?
• Did they tend to tilt more toward larger or smaller stocks?
• Were they more value-oriented, more growth oriented or somewhere in between?
• Was there a similar anti-momentum bias as seen in the U.S., intuitively coming from our annual rebalance?
Thanks to data published regularly on the Kenneth French Data Library, we are able to do a returns-based analysis that seeks to quantify answers to these questions through the process of regression. We compared the broadly focused, developed international WisdomTree Indexes to the appropriate MSCI EAFE Index benchmarks and show their respective value and growth cuts.
For definitions of terms and Indexes in the chart, visit our glossary.
Market Factors Takeaways: In our U.S. factor analysis, discussed in an earlier blog post, the dividend-weighted indexes showed lower “market factor” sensitivity or market factor loadings. On the international front, the market sensitivity factors more closely resembled the traditional market cap-weighted indexes with readings close to 1.0. One reason for this is that the U.S. is an outlier country in terms of dividend payout ratios. Internationally, the indexes provide greater representation and coverage of international markets. The indexes therefore provide market sensitivity close to the broad-market indexes.
Value Factor Takeaways: All WisdomTree-related strategies listed above weight securities by their Dividend Stream®. These strategies tend to tilt more toward the value segment of the markets. However, for the broad WT DEFA Index, the value loading is almost identical to that of the MSCI EAFE Index. Furthermore, the WT International LargeCap Dividend Index had a value loading lower than that of the MSCI EAFE Index. One reason for this is country allocations. Japan, for instance would show a low price-to-book value ratio and may represent considerable weight in the value factors, whereas on a dividend basis, Japan is under-weighted compared to a market cap-weighted index. This would lead to a natural bias in dividend strategies away from loading to the value factor that has greater exposure to Japan on a price-to-book value basis.