During 2014 we’ve noticed that large caps1 tended to outperform both mid-caps2 and small caps 3 in U.S. equity markets. While there are a lot of active managers4 focused on different ways to select and build portfolios of U.S. large caps, exchange-traded funds (ETFs) designed to track the returns of large-cap indexes after costs, fees and expenses are also becoming more prevalent.
To illustrate how the two approaches compare, we looked at how the WisdomTree LargeCap Dividend Fund (DLN) has done against active managers in 2014. We chose DLN because by design it provides exposure to some of the largest dividend-paying companies in the U.S.
For definitions of terms and Indexes in the chart, visit our glossary.
• DLN Outperformed More Than 91% of Large-Cap Active Managers in 2014: For the year-to-date period through October 31, 2014, DLN’s performance against U.S. large-cap active managers was impressive. We believe the primary reason for this is that DLN has more than 99% of its weight in securities greater than $10 billion in market capitalization. Large-cap U.S. stocks have been performing well, and DLN by design does not have exposure to other market capitalization size segments.
• 2008 or 2009? Something we’ve heard over time is that in tough markets active managers can potentially take a portion of their assets and go into cash, thereby providing a mitigation of downside risk. For this reason you may think active managers would have tended to outperform DLN in 2008, but that was not the case. As a matter of fact, DLN outperformed nearly 72% of the large-cap active managers in 2008. One caveat is that DLN tends to participate less on the upside. For example, the Fund faced a much greater headwind from its competition in 2009, when it beat less than 10% of large-cap active managers.
• What Happened in 2011? DLN beat almost 99% of active managers in 2011—a much higher percentage than either of its market capitalization-weighted benchmarks. Focusing on dividends during this period led to a less than 10% average weight to Financials, a sector that tended to be much more heavily represented within the market capitalization-weighted benchmarks. Within both of these benchmark Indexes, Financials was one of the worst-performing sectors during this period, so DLN’s under-weight to this sector was helpful to relative returns.