WisdomTree Investments Launching 20 New ETFs on Friday (DLS, DWM, WSDT)

WisdomTree Investments (WSDT.PK) just hosted their first conference call ahead of Friday's release of 20 exchange-traded funds. This is the largest 1-day release of ETFs ever - continuing the trend away from actively managed funds.

The common characteristic of the WisdomTree family is dividends. The yields are impressive in that many of them pay more than their comparable index. An example of this is their "DIEFA" fund, which I discuss further below. The fund family is also geared internationally with 14 non-US funds dominating the six US funds. Of the international funds, 3 will track Europe, 3 will track Japan, 2 will track the broader Pacific, and 6 are broad-based international funds.

This new line will follow the trend away from market-cap indexes and into fundamentally-weighted indexes. Jeremy Siegel, the Senior Investment Strategy Advisor to Wisdom Tree commented on the call about flaws in the market-cap structure. A market-capitalized index (based on the number of shares outstanding multiplied by the current stock price) assumes an efficient market where the stock price is fairly valued. We've recently seen fundamentally-weighted indexes (which use a rules-based methodology) outperforming market-cap indexes. This is because they give small-cap stocks a fair chance in the index rather than a miniscule weighting in the face of stocks like Microsoft. We've all seen the small-cap indexes outperforming the large-cap indexes for the past five years, giving reason for investors to consider this new route.

Siegel also pointed out that reinvested dividends have, historically, been the primary driver of total return in US equity markets.

WisdomTree is not the first to base ETFs on fundamentally-weighted indexes. RAFI is one of the more popularly licensed indexes which strays from market-cap weightings and has outperformed the S&P 500 over the last 1, 3, and 5-year periods. PowerShares, which uses a successful structured-equity approach, recently licensed the RAFI for a new fund to add to their already popular ETF line.

In terms of expenses, Wisdom Tree plans on staying competitive with other ETF families ranging from 28 to 58 basis points. As expected, the international funds will be slightly more expensive than the domestic funds, but the whole line is competitively priced.

This new line of funds will include the first ever International Small-Cap Dividend Fund (DLS). WisdomTree also has a "DIEFA" fund (DWM) which follows the MSCI EAFE index. The advantage to DIEFA is that it currently boasts over a 4.5% dividend, substantially higher than the MSCI EAFE index.

I really like this fund release for two reasons. The first, as pointed out by Jeremy Siegel and others, the market-cap approach is not necessarily the best approach to investing. It unfairly weights stocks like Microsoft which don't fundamentally deserve such a huge weighting within the indexes. The second reason has to do with current demographics. As baby-boomers start retiring, portfolio managers will be allocating portfolios towards dividend and other income-oriented products such as those found in the WisdomTree line. Combined with a tax-code which currently favors dividend investing, WisdomTree should remain fairly competitive in the ETF arena.

Related:

• More Powershares RAFI ETFs On the Way
• Robert Arnott on Market-Cap Weighted and Fundamental-Weighted Indexing
• Fundamental-Weighted Indexes Don’t Outperform
• Rob Arnott’s RAFI 1000 Fundamental Index — Not An Index At All
• Questioning Rob Arnott’s Fundamental Index As An Investment Vehicle