Due to their customized weighting methodologies, advisors and investors will have to take time to more closely examine the underlying holdings and investment strategy behind the smart-beta ETFs. [WisdomTree: Targeting Benchmark Size Exposures with Smart Beta Indexes]
Many WisdomTree ETFs are weighted by the absolute dollar value of a stock’s dividend payout. For example, the WisdomTree LargeCap Dividend Fund (NYSEArca: DLN) allocates a greater weight toward companies with a higher dividends. AT&T (NYSE: T) has a larger 2.9% weight in DLN than General Electric (NYSE: GE) 2.14%, because AT&T issued a $9.5 billion in total annual dividends, compared to General Electric’s $8.8 billion. [How Smart-Beta ETFs Differ Traditional Cap-Weighted Funds]
“Because we weight once a year by dividends,” Siracusano said, “we capture dividend growth.”
Bill Belden, managing director of product development at Guggenheim Investments, argues that the Guggenheim S&P 500 Equal Weight ETF (NYSEArca: RSP), which equally weights S&P 500 index components, provides “better diversification” than the traditional cap-weighted index.
Additionally, potential investors should be aware that many smart-beta strategies overlap, so people shouldn’t go overboard with their ETF selections as they could unknowingly go overweight a specific sector or stock.
For more information on smart-beta ETFs, visit our indexing category.
Max Chen contributed to this article.