Structure Matters: Schwartz On DXJ & Hedging

May 06, 2014

WisdomTree’s director of research Jeremy Schwartz discusses the firm’s recent white paper on modern indexing.

“Structure Matters,” by Dan Weiskopf, portfolio manager of Access ETF Solutions, examines issues about ETF structures in a series of interviews with ETF portfolio managers, index developers and other people who affect the structure of ETFs. The goal of the series is to highlight the different operating roles that individuals have that make the ETF structure work well for the investor.

In this installment, Weiskopf interviews Jeremy Schwartz, director of research for WisdomTree, which is very much at the center of the structural question about what modern indexing or “smart beta” means. WisdomTree, which publicly traded under the ticker WETF, was founded in 2004 and has assets under management of approximately $34 billion.

Dan Weiskopf: As WisdomTree's director of research could you provide some background and include how you work with Jeremy Siegel.

Jeremy Schwartz: Before joining Wisdom Tree in 2004, I started working with Professor Jeremy Siegel at the University of Pennsylvania some 13 years ago; I was one of his undergraduate students. I worked with him on the third edition of “Stocks for the Long Run,” which came out in 2002, and then I helped him write “The Future for Investors.”

Professor Siegel joined WisdomTree as its senior investment strategy advisor and consults the firm, and I still do some work with him at Wharton [School of Business].

Weiskopf: You recently released a paper called “Looking Under the Hood of Smart Beta.” What are the key takeaways from that paper?

Schwartz: The question we tried to address in that paper, What is “smart beta,” and what are the exposures you have? A lot of the academics use a four-factor-based model, the standard Eugene Fama/Ken French model, to try to figure out what factors can explain returns of a specific investment approach.

From our perspective, the difference between “beta” and “smart beta” may be the idea that smart beta seeks to provide an exposure with the potential to outperform the market, isolate or accentuate a certain characteristic of the market, or generate better risk-adjusted returns than the market, rather than merely measure the performance of all investable stocks in an equity market.

One of the discussion points we highlight is whether “smart beta” is just a small-cap-biased portfolio. We agree that some equal-weight strategies have a small-cap tilt, but when you look at WisdomTree's core-dividend, weighted indexes, or earnings-weighted indexes, especially in our large-caps, they actually have a bigger large-cap bias.

A second point the paper addresses is the value tilt inherent in our dividend and earnings indexes. Dividends are more value-tilted than earnings, for sure, but we showed that while our dividend family has a value bias, dividend indexes were certainly more than just a value index, as they out performed value indexes during the past seven to eight years.

Moreover, earnings-weighted indexes outperformed traditional core cap-weighted indexes since their inception—mid- and small-caps significantly—despite growth beating value over that same period.

 

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