With market capitalization-weighted indexes, when constituents increase in price compared to other stocks, they gain greater weight and impact on the performance of the index. WisdomTree Indexes employ a rules-based rebalancing mechanism that adjusts relative weights based on underlying dividend trends. During the rebalancing process, which occurs once per year for each Index, the relationship between price change and dividend growth is measured.
• WisdomTree Dividend Index rebalance process typically is driven by both:
1. Dividend growth: Faster dividend growers see weight increased
2. Relative performance:
– Underperformers typically see weight increased
– Outperformers often see weight decreased
In what follows, we outline how the annual screening impacted the sector composition of the WisdomTree Equity Income Index (WTHYE).
Sector Changes for the WisdomTree Equity Income Index
• The Energy sector deserves special note within WTHYE, because it added more than 8.6% to its weight as of the November 30, 2014, Index screening and became the third-largest sector represented. The mechanism driving this change was average sector dividend growth, coupled with below-average performance over the period, improving the relationship between dividends and price. Exxon Mobil Corp. was a noticeable addition to the Index with a maximum weight of 5.0%. Between annual screening dates, Exxon’s price declined 3.2%, but its dividends per share increased 9.5%, which increased its dividend yield 35 basis points (bps), from 2.63% to 2.98%1. Dividend yield is relevant to WTHYE because the Index first ranks eligible securities by dividend yields to screen the top 30% of the universe for inclusion before weighting them by their dividends.