As the first quarter comes to an end and the market readies for the upcoming earnings season, investors may look to a suite of outperforming earnings-based exchange traded fund strategies that have been around for a decade.
March 31 marked the ten-year anniversary of the line of WisdomTree domestic earnings family of ETFs, including the WisdomTree MidCap Earnings Fund (NYSEArca: EZM), WisdomTree SmallCap Earnings Fund (NYSEArca: EES), WisdomTree Total Earnings Fund ETF (NYSEArca: EXT) and WisdomTree Earnings 500 Fund (NYSEArca: EPS), which have outperformed the vast majority of peers in their respective Morningstar categories over the decade-long period.
These earnings-based ETF strategies were among the first alternative index based or what we now consider smart beta index ETFs that helped provide investors an alternative to traditional market capitalization-weighted indices.
Specifically, 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.
Academic research, notably the Fama and French Three Factor Model, and 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.
The resulting earnings-weighted index-based strategy have allowed investors to generate returns that have beaten both active and passive competitions for the past decade.
For instance over the past decade, EZM has outperformed 99% of its peer group in its respective Morningstar category, EES has outperformed 88% of its peers, EXT outperformed 87% of its peers and EPS outperformed 80% of peers.
“WisdomTree is one of the few smart beta providers with a proven performance record over the past decade,” Luciano Siracusano, WisdomTree’s Chief Investment Strategist, said in a note. “Ten years of real-time results are a significant milestone for our earnings-weighted ETFs and a testament to the strength of this strategy across a mix of market conditions. By weighting profitable companies based on the earnings they generate, WisdomTree has created broad exposures to major U.S. equity classes, while helping investors generate low-fee alpha in the core of their allocations.”