The ETFs track earnings-weighted indices that screen for positive cumulative earnings over their most recent four fiscal quarter period and assigns weights to components to reflect the proportionate share of the aggregate learning’s each company generated, so those with greater earnings have larger weights. Due to this particular indexing methodology, the ETFs lean toward value and quality factors, and within the mid- and small-cap ETFs, the size factor, which have all been historically associated with excess returns compared to the broader market over the long-haul.
The current P/E ratios of 19.6x for EZM’s underlying WisdomTree U.S. MidCap Earnings Index and 17.9x for EES’s underlying WisdomTree U.S. SmallCap Earnings Index, while slightly elevated, still represent discounts to the market, which may help investors better manage the valuation risks of rising multiples, especially in an ongoing bull market run.
“This methodology has provided a capability to raise the earnings yield (or lower the P/E ratio) compared to a similar market capitalization-weighted universe of stocks,” Gannatti said. “When searching for a strategy in an environment where the markets are experiencing overall lower earnings yields (or higher P/E ratios), this approach could be even more important when considering longer-run returns.”
For more information on the small-capitalization market, visit our small-cap category.