• Information Technology Leaders: The Technology sector saw its U.S. Earnings Stream grow the fastest over the last seven years: approximately 92.9% cumulative growth from 2007 through 2014.
The growth in earnings is an important element of the annual rebalance. The other critical factor is stock price performance. Rebalancing back to the Earnings Stream forces a discipline to sell stocks that have become more expensive—in other words, selling stocks that have appreciated relative to their earnings (see rising price-to-earnings ratios).
Below we look at the characteristics of the changes that occurred in the WisdomTree Earnings Indexes.
WisdomTree Earnings Family Rebalance Illustrated (as of 11/30/14 Index Screening)
For the Broad-Based WisdomTree Earnings Index (WTEI):
• The companies that saw their weight increased at the rebalance had a median earnings growth of 21.4%, which was greater than the median earnings growth of all companies at 7.4%. Companies that saw their weight lowered at the rebalance had below-average earnings growth of just -10.4%.
• Moreover, price performance was also a key driver of relative changes. The stocks that saw their weight increased at the rebalance had below-average returns of 4%. The typical stock that saw its weight increased had a median total return that was more than 8.9% lower than the median of stocks that had their weights lowered. The typical stock that saw its weight decreased had a median total return that was 5.2% higher than the median of all stocks.
Additionally, we see that the earnings methodology has consistently raised weights to companies that have grown their earnings across the broad, large, mid– and small-cap spaces and lowered weights to companies that have contracted their earnings. The second prong to the rebalance is that it results in raising weights to constituents that have underperformed and lowering weights to constituents that have outperformed.