EES can be alternative to traditional, diversified small-cap ETFs, which may track benchmarks chock full of richly valued growth stocks from the healthcare and technology sectors.
Historic data have shown that smaller companies typically outperformed larger companies over time as more nimble, smaller businesses have more room to quickly expand. Additionally, many argued that there are inefficiencies in the market as investors mispriced the value factor, which leaves these types of companies open to outperform over the long-term.
“At the end of 2018, the WisdomTree U.S. Earnings Index indicated a forward P/E ratio that was more than 54% less expensive than the Russell 2000 Index,” according to WisdomTree. “The WisdomTree U.S. Earnings Index has been in live calculation since February 1, 2007, and has never ended a year with a discount like it has now. This tells us that, if there are to be late-cycle rallies and a bit of multiple expansion in U.S. small caps, this strategy may have the potential to capitalize.”
For more information on alternative index-based strategies, visit our smart beta category.
