Earnings Tilt Paying Off

April 17, 2014

Funds weighted by earnings outperforming cap-weighted ETFs.

Focus on Earnings ETFs

We're deep in the throes of a disappointing earnings season that has some markets quivering. Given that earnings are what bring equity investors to the table in the first place, the past quarter's tepid results are certainly concerning.

Unbeknownst to many, WisdomTree has a successful suite of U.S. ETFs that emphasize company earnings in their methodology. The suite of ETFs selects and weights constituents based on earnings.

To review, the general criticism of market-cap weighting is that the weighting of a company increases as its stock price becomes more expensive. After all, do you really want to buy more of something because it became more expensive?

WisdomTree's suite offers investors an alternative option: As companies become more profitable, they earn a larger allocation. Over the past year, this approach has rewarded investors: the WisdomTree SmallCap Earnings ETF (EES | A-84) has outperformed its market-cap-weighted competitor, the Vanguard Small-Cap ETF (VB | A-100), by 6 percent.

Similarly, the WisdomTree MidCap Earnings ETF (EZM | A-76) beat its cap-weighted competitor, the Vanguard Mid-Cap ETF (VO | A-95), by 7 percent.

Performance differences were more muted in the large-cap and total market segments, where the WisdomTree Earnings 500 ETF (EPS | B-94) and the WisdomTree Total Earnings ETF (EXT | B-93) returned 22 percent apiece over the past year.

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