Wisdomtree dividend-weighted ETFs: How have they done?

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baw703916
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Wisdomtree dividend-weighted ETFs: How have they done?

Post by baw703916 »

Hi diehards,

It's been a little over 10 months since Wisdomtree came out with 12 dividend-based ETFs, six each for domestic and international (covering the EAFE developed markets, there are additional regional Intl. ETFs that I'm not considering here). A common response to the whole "fundamental indexing" concept has been "It does backtest well, but let's wait and see how it does going forward." I can't argue with that. :wink:

Now that there's not quite a year of real-time data, it may be worth seeing how things look. In the spirit of disclosure, DLS is the only Wisdomtree ETF that I own--primarily because I don't have DFA access and wanted a way to do Intl. Small. I've been pretty much an agnostic on the whole fundamental vs. market-cap debate--"Show me the money!"

For each category (domestic and Intl.) Wisdomtree has six dividend-weighted ETFs. Five of them are weighted based on the companies' total dividend payout: for large-, mid-, and small-cap, for all three "total dividend", and "high yielding" (screened for the top 30% by dividend yield, but weighted by total payout.

The sixth ETF for both foreign and domestic is the "dividend top 100" which screens the top 100 companies of the large-cap dividend ETF by dividend yield, and then weights those by dividend yield, not total dividend payout.

The dividend yield for the Top 100 ETFs (for both foreign and domestic) is higher than that of the Large-cap, but less than that of the High-yield.

I looked at the performance of the four ETFs for both foreign and domestic which are basically large-cap: Large-cap, Total, High-yield, and Top 100. I compared them to market -cap-weighted value and core funds: EFV and EFA for Intl., and VTV and VFINX for domestic.

For both foreign and domestic, the three dividend ETFs based on dividend payout didn't perform much differently than the market-cap weighted value funds. But the yield-weighted Top 100 ETFs significantly outperformed in both cases. So maybe this approach is onto something...

Now admittedly 10 months is not very long, but since the construction is passive, and also since the results look very similar for foreign and domestic, I don't think it can be completely written off as a fluke.

I'm not sure it's really a free lunch though; at least some of the outperformance of the "Dividend top 100" ETFs may well be risk-based:

-Fewer companies=less diversification=higher volatility
-Since the weighting depends both on prices and on dividend payout, it's liable to have higher turnover=less tax efficiency.
-A high yield may be an effect of mispricing, or it may reflect real risk: I recall New Century Financial had a nominal dividend yield well above 100% just before declaring bankruptcy. I'm not sure if the construction has some sanity check to guard against giving a stock a humungous weighting in such an anomalous situation.

Interesting.

Best wishes,
Brad
Last edited by baw703916 on Sat Apr 28, 2007 4:59 pm, edited 1 time in total.
grumel
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Post by grumel »

This Dividend weighted etf did extremly bad during the last change of components:


http://www.indexchange.de/funds.aspx?ft ... de&tabid=3

Most added components did rise 15% on the day of adition, and the ones that were thorwn out did fall about 15%. Therefore i am done with dividend etf if they arent construct less vulnerable to market impact.

Funny thing is, theres an etf on the same index from ishares, which did outperform the indexchange one as well es the index itself by some percent, simply by buying/selling a bit more inteligent.
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baw703916
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Trading

Post by baw703916 »

Grumel,

Wow, that does really sound like terrible trading on the part of the fund managers! I'm not sure that's really an effect of it being a dividend-oriented ETF. All indices have some turnover, so all funds have to do some buying and selling. I think for a typical market cap weighted value index fund the turnover is typically 20% or so a year.

Although you can't really do this for a new fund, one way to see how skillful a fund is at trading is to see how its return compares to the index it tracks. If it consistently lags by more than the expense ratio, it's probably not very good at trading when its index updates. For a new fund, looking at other funds run by the same company may give an indication of how good it will be at trading.

I've heard in various places that Vanguard, DFA, and iShares all have good reputations for trading effectively. Your observation that the iShares ETF outperformed the index seems to support this.

Brad
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Some numbers

Post by baw703916 »

A comparison of Wisdomtree's ETFs with some others from 7/1/2006 - 4/27/2007

Dividend yields for the Wisdomtree funds are for the underlying "indices" (aside: I agree with Rick Ferri that they aren't *really* indices, but they do seem to have a reasonable and understandable methodology which is stated on Wisdomtree's website)

Dividend yields for the other funds are what they actually paid out, although this is affected by dilution as the number of shares changes...

Domestic Funds/ETFs

Code: Select all

Name                        Ticker      Dividend Yield %          Return %

Wisdomtree High Yielding     DHS             3.70                   20.66
Wisdomtree Largecap Div.     DLN             2.65                   20.20
Wisdomtree Div. Top 100      DTN             3.33                   23.78
Vanguard Large Index         VV              1.63                   19.53
Vanguard Value Index         VTV             2.45                   21.59
iShares S&P500 Value         IVE             1.99                   20.48
iShares M* Large Value       JKF             2.46                   21.66
iShares DJ Select Div.       DVY             3.10                   20.60
DFA Large Value              DFLVX           1.40                   19.29
International Funds/ETFs

Code: Select all

Name                        Ticker      Dividend Yield %          Return %

Wisdomtree High Yielding     DTH             4.20                   30.36
Wisdomtree Largecap Div.     DOL             3.41                   26.85
Wisdomtree Div. Top 100      DOO             3.93                   35.84
iShares EAFE Index           EFA             2.02                   24.21
iSHares EAFE Value Index     EFV               ?                    25.38
Powershares Intl. Div.       PID             2.75                   23.26
DFA Intl. Value              DFIVX           2.65                   32.40
Vanguard Intl. Value(active) VTRIX           1.97                   23.57
The Wisdomtree High Yielding International ETF (DTH) has a higher return than the largecap dividend (DOL) and the Vanguard and iShares funds. This may be because DTH contains some mid-and smallcaps, which have done phenomenally well this past year.

The two "Top 100" funds are composed exclusively of largecaps.

Brad

Edit 4/29/07 added some additional ETFs (PID, DVY, JKF, IVE) for comparison
Last edited by baw703916 on Sun Apr 29, 2007 2:19 pm, edited 1 time in total.
grumel
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Post by grumel »

I'm not sure that's really an effect of it being a dividend-oriented ETF.
The index construction did definitly play a large role in this, and i doubt ishares can do so much better in the future, now that everyone knows how big the influence of this dividend index is. From a logical point of view, with arbitrageuers jumping in now, the market impact should be more moderate, and take place on the day of component change anouncement- not at the day of actual index changes. Ishares cant do anything about that, arbitrageurs willl earn a lot of money from etf investors and ruin all the nice backteste performance data. Safe to asume that big jumps wont hapen again, but still theres a systematical fault of high market impact with all that money getting thrown at small companies with high dividend yield.

Or maybe wisedom tree is doing sth different like weighting after the actualy amounth of money payed out to shareholders. But in the case of that Select Dividend Index, dividend weithing means the higher the dividend yield, the higher the index weight of a component gets independet from the companies size or absolute number of dividend payments.
Hm, why do i keep talking about this Select Dividend index, when probably no one knowes what i am talking about, heres a link to the index provider:
http://www.stoxx.com/indices/types/select_dividend.html

Ironically, the us version of that index might still be an interesting option because its a bit different desigend and naturally far less popular.

And considering that 20% Turnover is normal for value index funds: If i remember Swensen right, he gave an example of two different value indexes one with high other with low turnover, and there was a difference in performance from over 1% a year.

So i would, theres definitly a general danger whenever you do something else then a total stock market fund ( which arent even aviable here in Europe ). And it gets higher when turnover is high or indizes are specially popular under indexers and all that closet index "active" funds.

After all, my major point was just: take care with dividend weigthing, as its especially vulnurable, and has already gone bad somewhere else.
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CountryBoy
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Brad...

Post by CountryBoy »

Could you please tell me how you executed or were able to post those very nice tables that you did listing the funds. It was not not with a gif or a jpg. Was it through using html or bbc with a table? Many thanks.
Country Boy
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baw703916
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Country Boy

Post by baw703916 »

Thanks for complimenting how the tables came out! I spent quite a while trying to figure out how to do those..

I highlighted them and then clicked the "Code" box on the line above the posting window (where the bold, italics, etc. options are).

I think the Code option was intended to quote programming code--the relevant part for creating a table is it doesn't automatically delete multiple spaces and also doesn't use a proportional spaced font (so each letter takes the same amount of space and makes the columns line up nicely).

Maybe there's a more elegant way to do this...but this seemed to work, at least :)

Brad
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