o The value factor is particularly strong in dividend strategies focused on small- and mid-cap segments. Although the small-cap segment has a much stronger value tilt than the mid-caps, both have a much larger tilt to the value spectrum than the broad market strategies.
o Note that the market cap-weighted value MSCI EAFE Mid Cap Value and MSCI EAFE Small Cap Value Indexes were more value-tilted than the dividend-weighted approach. The dividend weighting therefore was between the traditional market cap-weighted indexes and the value segments of those indexes when measured on sensitivity to this value factor.
Size Factor Takeaways: In terms of size tilts, WT DEFA, WT DEFA Equity Income and WT International LargeCap Dividend have the biggest large-cap tilts when compared with all other strategies listed above. In other words, the three strategies have the “purest” large-cap return attribution in the developed international space. When we look at the WisdomTree strategies focused on the small-caps, we cannot describe these Indexes as solely exposed to the small-cap premium. Instead, the WT International SmallCap Dividend Index has an equally notable tilt to the value segment, through a methodology that weights its constituents by dividends.
o The capability to access multiple tilts within one indexing strategy is an important point to note. As we have previously discussed, Fama/French1 has shown the persistence of both a small-cap and a value premium, both of which can be accessed by the WT International SmallCap Dividend Index.
Momentum Factor Takeaways: While dividend strategies in the U.S. tend to display strong anti-momentum tendencies, it is less clear in the developed international space. Many of the WisdomTree strategies still have a small tilt toward being anti-momentum.
Knowing Factor Exposures can Help with Portfolio Construction
Knowing these factor loadings, in our opinion, is only a first step. The critical question regards how to apply this information to portfolio construction. In a future blog post, we will examine how we might go about building a portfolio that matches the size exposure of the MSCI EAFE Index but uses different mixes of WisdomTree Index tools to get there.
1Fama and French: Refers to the factor work that Eugene Fama and Kenneth French have done to describe stock returns.
Important Risks Related to this Article
Dividends are not guaranteed, and a company’s future ability to pay dividends may be limited. A company currently paying dividends may cease paying dividends at any time.
Investments focusing on certain sectors and/or smaller companies increase their vulnerability to any single economic or regulatory development.