Zooming in on P/E Ratio Exposures by Quartile & Noting Exposure to Companies with Negative Profits
• More Weight to Lower-Priced Stocks – The WisdomTree India Earnings Index has over 60% of its weight in the two lowest-priced quartiles, which is significantly more than the Nifty or MSCI India indexes. 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 – On the other hand, WisdomTree’s approach has less than 40% of its weight going to the two higher-priced P/E quartiles. The MSCI India Index has over 40% of its weight in the second most expensive quartile alone.
• 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 keeps the weight to firms that we feel tend to be more speculative and of lower quality at zero. Neither of the market cap-weighted indexes above shares this requirement, but it is worth noting that they focus on large-cap stocks, which have a higher tendency to deliver positive cumulative profits.
1Source: Bloomberg, as of 8/31/2014.
2References the WisdomTree Equity Income Index.
3References the WisdomTree LargeCap Dividend Index.
4References the WisdomTree U.S. Dividend Growth Index.
Important Risks Related to this Article
Investments in emerging, offshore or frontier markets are generally less liquid and less efficient than investments in developed markets and are subject to additional risks, such as risks of adverse governmental regulation and intervention or political developments. Investments focused in India are increasing the impact of events and developments associated with the region, which can adversely affect performance.