Interview: Luciano Siracusano, Director of Research for ETF Firm WisdomTree Asset Management 54 comments
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This is the first in a series of Seeking Alpha interviews with prominent individuals in the investment world. These, however, are interviews with a twist: the individual has agreed to answer questions and respond to comments not from a single interviewer, but rather from our community of readers and contributors.
This first interview is with Luciano Siracusano, Director of Research for ETF firm WisdomTree Asset Management, which has sponsored the interview. It works like this:
- Luciano briefly introduces himself and the issues he's focused on below.
- Readers and contributors can immediately start to post questions and remarks using the comment box below (Note: you need to sign up for free registration and be logged in to do so).
- Seeking Alpha editors will not filter or edit the questions and comments from readers, except to delete insulting or overly aggressive language.
- Luciano has agreed to respond to the questions and remarks for two days, and will begin posting answers to readers' questions on Thursday, December 14th. Readers can track his answers and respond to them on Thursday and Friday.
- Readers can respond to his responses during that time.
I'm Luciano Siracusano, Director of Research at WisdomTree Asset Management and a registered representative of ALPS Distributors, Inc.
Thanks to Seeking Alpha for providing this opportunity to chat directly with the ETF investment community. At WisdomTree, we developed the first family of fundamentally weighted indexes and ETFs and now offer 30 fundamentally weighted ETFs that in our view can provide investors access to the dividend stream around the world with precision.
Our initial product launch of 20 ETFs in June included the first international smallcap ETFs listed in the US and the first family of ETFs that track indexes comprised of high-yielding international equity securities. In October, we announced the addition of 10 international sector ETFs, with each ETF to focus on a specific industry sector tracking an underlying index consisting of only international equity securities, so we're the first ETF family to offer pure international sector exposure. You can view a complete list of all of our ETFs here.
WisdomTree Investments (WSDT) has some distinguished people involved, including hedge fund pioneer Michael Steinhardt (a Board member) and Wharton Professor Jeremy J. Siegel (our Senior Investment Strategy Advisor). Last month we announced that WisdomTree ETFs now has over a billion dollars under management.
I'm happy to discuss a range of topics with Seeking Alpha's readers, including: fundamentally weighted versus market cap weighted indexes, the rationale for dividend based ETFs, international investing with ETFs, and ETFs generally. Please leave your questions by using the comment box below.
Because of the strict regulation of mutual funds and ETFs, legal issues are important. Thus: Investors should consider the investment objectives, risks, charges and expenses of the funds carefully before investing. A prospectus describing the funds, containing this and other information, is available by calling 1-866-909-WISE (9473) or visiting our website at wisdomtree.com. Investors should read each fund’s prospectus carefully before investing. There are risks associated with investing including the possible loss of principal. Past performance does not guarantee future results.
In addition to the normal risks associated with investing, foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty. Funds focusing on a single country and funds that emphasize investments in smaller companies generally experience greater price volatility. Transactions in fund shares will result in brokerage commissions and will generate tax consequences.
The performance of WisdomTree Indexes prior to June 1, 2006 is based on a back test, i.e. calculations of how an index might have performed in the past had it existed. Hypothetical back tested performance has inherent limitations and is not indicative of future results. Index performance data assumes reinvestments of dividends and does not reflect management fees, transaction costs or other expenses. You cannot invest directly in an index.
This Q&A represents the opinion of WisdomTree and is not intended to be a forecast of future events, a guarantee of future results nor investment advice. It should not be deemed an offer or sale of any investment product and it should not be relied on as such. The user of this information assumes the entire risk of any use made of the information provided herein. This information is not to be otherwise used or distributed. None of WisdomTree Investments, WisdomTree Asset Management or the WisdomTree ETFs, nor any other party involved in making or compiling any information in general makes an express or implied warranty or representation with respect to information in this informational Q&A.
The WisdomTree ETFs are registered for sale in the United States only and are not intended for use by non-US investors.
WisdomTree Funds are distributed by ALPS Distributors, Inc.
© 2006 WisdomTree Investments, Inc. "WisdomTree" is a service mark of WisdomTree Investments, Inc. WisdomTree Investments, Inc. has a patent pending on the methodology and operation of its indexes.
Yahoo! Finance readers can leave questions and view Luciano's answers by viewing the original article on Seeking Alpha.
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This article has 54 comments:
Thanks for taking the time to answer questions! I've got a couple:
1) Have we, or are we, reaching the point where there are too many ETFs?
2) How can WisdomTree survive against much larger and richer companies like Barclays iShares?
Seriously though, I am curious if the same people who say that having 300 ETFs are “too many” say the same thing about having 8,000 mutual funds or 10,000 hedge funds. Honestly, I think the best way to answer this is “compared to what?” Actively managed mutual funds, on average, have higher fees than ETFs, are less liquid, are less transparent, and are less tax efficient. Yet there are more than 8,000 of them. I think some may be thinking about this issue backwards. What do you guys think?
It is true that WisdomTree competes against some of the greatest names in asset management today. However, in our view, WisdomTree has a number of unique competitive advantages. We believe WisdomTree’s proprietary research has produced an innovative product strategy. We were first to market with a family of fundamentally weighted ETFs and expect to continue to grow as market awareness of WisdomTree grows. Early customer response seems to show significant interest in our approach and we are encouraged that our ETFs have attracted $1.3 billion in assets under management in just 6 months. Additionally, we have an experienced management team; in fact, a number of our senior people came from Barclays.
I purchased some shares of "WisdomTree International SmallCap Dividend Fund (DLS)", which as you said is the "first international smallcap ETFs". But MorningStar says it mainly consists of Medium(Mid) Cap companies. Any comments? Thank you.
URL: quicktake.morningstar....;Symbol=DLS&fd...
thanks,
Luciano
I am not sure if you are allowed to talk about the 31 new ETFs that are yet to be launched. I was interested in learning more about the "India Total Dividend Fund".
Is this ETF based on an existing index?
Thanks for doing this! Couple of questions:
(1) What do you think of this argument that the case for dividend-paying stocks seems to be weak?
(2) Where do you see the expense ratios of ETFs in general, and WisdomTree ETFs in particular, going over time?
I disagree that the case for dividend-paying stocks is “weak,” as you put it. First, let me just say that WisdomTree’s approach is not based on a moment in time, or what is happening this week or even this year. It is based on research spanning many decades. However, if you want to limit this discussion to 2006, if you look at today’s Wall Street Journal in the Money & Investing section and turn to Lipper’s stock fund indexes, you will see that the “Equity Income Fund” category is the best performing domestic fund category this year, up 17.65%. So, I believe you can make the opposite case: that dividend-paying stocks in 2006 have actually shown relative strength compared to the rest of the U.S. market.
With respect to your question on expense ratios, I have an answer for you. But I need to step out into a meeting now and will be returning at around 1:00 est. I will answer it then and continue answering your questions throughout the day.
On the case for dividend stocks, do you think the case for them is statistical, or also theoretical -- ie. that dividend stocks *should* perform better, not just *have* performed better?
This question of expense ratios and ETFs is really very interesting, as I think it captures how the ETF industry has been evolving. When BGI, State Street and Vanguard launched their domestic ETFs tracking traditional cap-weighted indexes, their expense ratios for domestic ETFs were really quite low – reinforcing one of the great strengths of ETFs. These were liquid, transparent, low-cost ways to own large segments of the market in a single fund that trades on a stock exchange like a stock. Over the past few years, new ETFs have emerged – ones that tracked indexes based on less transparent indexes, what some have called “black box” selection and weighting strategies. These ETFs have generally carried higher expense ratios and track more narrowly focused areas of the market. Some contain special bells and whistles. WisdomTree bucked this trend by creating ETFs that cover broad segments of both domestic and international markets, that are based on transparent, fundamentally-weighted indexes, and that we believe are priced competitively: 28 to 38 basis points domestically, and 48 to 58 basis points internationally.
Where is the ETF industry headed? I think ETFs will ultimately mirror what is happening in the indexing industry. So if the great debate going forward in the world of indexing is not “active versus passive, “ but “passive versus passive,” then I would expect the ETF industry to ultimately end up with cap-weighted ETF providers on one side and fundamentally-weighted ETF providers on the other. WisdomTree is at the heart of that debate and I trust you know on which side we stand.
Great to meet you last week. Here is one I meant to ask.
In looking at the top ten of DEB and DEW, I'm not sure how Total (TOT) can be number 4 in DEB but not be in the top ten for DEW (as of 12/11). Another example Lloyd's has a different rank in each of the two. I get how the weightings can be different percentages but not how the order can be different.
Thank you!
The reason Total SA (FP FP) is not in the top ten holdings for DEW, the WisdomTree Europe High-Yielding Equity Fund, is that Total SA is not in DEW’s underlying Index: the WisdomTree Europe High-Yielding Equity Index (WTEHYE). The company Total SA did not qualify for inclusion in WTEHYE, which is a sub-set of the WisdomTree Europe Dividend Index (WTEDI). WTEDI serves as the underlying index for DEB, the WisdomTree Europe Total Dividend Fund.
All of our high-yielding equity indexes are created by ranking the stocks within WisdomTree’s "broad market indexes” by dividend yield, and then selecting the top 30% of the companies based on dividend yield that meet our other inclusion requirements (there is a higher threshold for market capitalization and liquidity). Then these indexes are weighted once a year by the magnitude of the cash dividends companies pay – so larger companies with more shares outstanding, paying greater aggregate dividends, typically get larger weights. The reason Lloyds TSB Group (LLOY LN) has a different rank is for the same reason. Some of the companies that paid larger cash dividends than Lloyd’s did not qualify for inclusion in the high-yielding subset because their dividend yields were not high enough at the annual screening point. One final point: these rankings and weightings reflect dividend yields and company contributions to the dividend streams of their respective regions at a snapshot in time, once a year. To limit turnover, weights during the year are not adjusted for increases or decreases in dividend per share, or for share issuances or share buybacks, so the weights during the year will change based on fluctuations in the stock price of the individual components. The beauty of dividend weighting is that it incorporates into the index a rules-based mechanism that adjusts annually, for what we believe, is relative value. In our research we were able to quantify the impact such dividend weighting had on overall returns and volatility compared to comparable cap-weighted indexes. Our research indicated to us what the characteristics of these indexes would have been had they existed, in every part of the developed world and in every major market cap segment, before we ever launched an ETF to track them.
The performance and characteristics of the WisdomTree Indexes prior to June 1, 2006 is based on a back test, i.e. calculations of how an index might have performed in the past had it existed. Hypothetical back tested performance has inherent limitations and is not indicative of future results. Index performance data assumes reinvestments of dividends and does not reflect management fees, transaction costs or other expenses. You cannot invest directly in an index.
For more information on WisdomTree index construction and current constituents, please visit wisdomtree.com. We have updated information on both the indexes and the WisdomTree ETFs.
I have two questions:
1) Is there a market segment that you believe the Wisdom Tree strategy is particularly suited for?
2) PowerShares has introduced the FSTE RAFI Sector funds which also use a fundamental strategy. What do think of them?
Thank you.
Suitability depends on the client and the investment objectives that need to be met. WisdomTree’s goal has always been to create viable alternatives to cap-weighted indexes in every major market segment and across major regions of the developed world. If we look at how allocations are made in the real world -- by financial advisors, consultants and investment committees -- some of the greatest pools of capital are benchmarked to indexes in the US. large-cap space. WisdomTree has four domestic funds that are predominantly largecap (DTD, DLN, DHS, and DTN). They meet different needs depending on how much selection risk one wants to take and whether the goal is to gain large-cap exposure with generally lower historic betas, or the goal is to provide a fundamental alternative to large-cap capitalization-weighte... indexes. If you had an interest in the international small-cap space, you had no U.S.-listed ETFs to choose from until WisdomTree came to town. Now you have three choices from WisdomTree -- DLS, DFE and DFJ – including ETFs that give exposure to Japanese small-cap and European small-cap companies. We believe WisdomTree has tools that investors can use to create global dividend-based portfolios. At WisdomTree, we don’t give investment advice. We just provide fundamentally-weighted alternatives to traditional cap-weighted index funds.
Over the past several years, there have been a series of fundamentally weighted ETFs introduced into the market place, beginning in 2003 with DVY, which was designed to track a new Dow Jones index, The Dow Jones Select Dividend Index. This dividend-based index ranks and selects companies based on certain fundamental ratios and then weights components in the index based on dividend per share, a fundamental metric. FTSE actually has two families of fundamentally weighted indexes and, in our view, we share common ground conceptually on why you would want to choose the fundamentally weighted approach. With respect to the specific sector funds you mentioned, I really don’t know a lot about them. Maybe some of you bloggers could educate me as to how specifically the stocks are selected for the underlying index and how specifically the components are weighted. There are now more than 100 domestic sector ETFs in the U.S. WisdomTree’s fundamentally weighted international sector funds exist in a much less crowded space. In October 2006, WisdomTree brought to market the first pure international sector ETFs listed in the U.S.
thanks
I am fairly index agnostic relative to wanting the exposure for my clients. <strong>Any chance WisdomTree could get involved in this way?</strong> The interest and so I think the demand is very big.
1) What are current AUM?
2) What is the current fee structure?
3) Why has such an impressive management team chosen to list on the credibility-challenged Pink Sheets?
4) When will you start filing financials? How are potential investors supposed to analyze WSDT in the meantime?
Thank you very much, your response is appreciated.
As of yesterday's close, assets under management for WisdomTree ETFs were approximately $1.35 billion. By the way, assets under management for each WisdomTree fund are disclosed daily on our website.
Regarding fees, the expense ratio for our domestic equity ETFs is 28 to 38 basis points, and 48 to 58 basis points for our international equity ETFs. As you probably know, commission charges also apply when you buy or sell ETFs on an exchange.
At WisdomTree, we also have the ability to provide separately managed accounts for institutional and other qualified investors, or to license our IP to pension fund managers who wish to manage their portfolios “in house” based on WisdomTree’s proprietary indexes. Fee schedules for our non-ETF products vary; more information on these other options is available by going to the home page on WisdomTree.com and clicking through on the tab at the top entitled, "separate accounts.”
1. We know that dividend-paying stocks have a good track record in the US, but how have foreign dividend paying stocks performed relative to foreign non-dividend-paying stocks?
2. Have you compared the performance of WisdomTree's indexes to the hedge fund indexes? You could calculate what actual performance would look like after fees assuming hedge fund fees of 2% of assets and a 20% performance fee, and WisdomTree fees per the ETFs. It would be interesting to see if on average buying WisdomTree ETFs is a better value proposition than investing in hedge funds!
On our website, we have real-time total return data for both our international ETFs and our international indexes. This information gives you a basis to compare non-U.S. dividend-paying stocks to comparable cap-weighted international indexes since our indexes and ETFs were launched in June, 2006. WisdomTree also displays information on its website that provides data to make comparisons over longer time periods. By the way, Dow Jones Indexes and MSCI have also published materials showing how portfolios of non-US. dividend-paying companies would have performed compared to relevant cap-weighted indexes on an annualized basis over longer-time periods. I believe the answer to the thrust of your question can be found by examining these different materials.
Thanks for doing this Q&A.
I'm wondering what your thoughts are on this recent Seeking Alpha article by Asif Suria, which looks at WisdomTree itself from an investor's perspective:
WisdomTree: Riding the ETF Wave
financial.seekingalpha...
Thanks for the opportunity to pose a question or two. Could you discuss or point me to discussions of the historical performance of the fundamentally-based weighting for your funds? Further, can you discuss why it is reasonable to expect fundamentally weighted indices to out-perform in the future?
Regards,
Geoff Considine
The first 20 WisdomTree ETFs were launched on June 16th. Performance information for those funds are updated monthly and are available at wisdomtree.com. Information on the historical performance of the WisdomTree indexes since June 1, 2006, and information on the hypothetical performance of the WisdomTree indexes prior to June 1, 2006, is also available at wisdomtree.com.
Regrettably, I need to sign off now and head out to some meetings. I will be back in my office tomorrow afternoon to address more questions.
Best to all of you who are participating in this discussion,
Luciano
Thanks for having a look at our questions.
1) Do you plan to issue further fundemantally indexed ETFs based on more sophisticated criteria than the sole dividend ? I have in mind an ETF based on Magic Formula Investing popularized by Joel Greenblatt or on similar formula which take into account ROIC, EBITDA/EV, B/V etc...
2) Fundamentally indexed ETF are getting huge increases in assets under management. Do you think that in a few years they will reach such a huge amount of assets under management that it will be more difficult for value/contrarian investors to pick up bargains since once a valuation threshold is reached there will be "automatic" buyers with lot of capital available to buy unloved stocks ?
Regards,
Vincent Di Carmine
WisdomTree Investments is committed to innovation and we will continue to evaluate the merits of various passive, rules-based, investment strategies that can serve investors. We believe our first family of fundamentally-weighted... dividend ETFs are gaining market acceptance because they track transparent, unique and easily understood indexes that measure broad segments of the developed world. To the extent we can create products that are additive to or complement what we have done already we will, but I can’t comment on any specific applications at this time because of SEC regulations.
Secondly, assets under management for fundamentally weighted indexes are growing rapidly, but one must realize that we are talking about growth from small absolute levels. There are trillions of dollars linked to capitalization-weighte... indexes and many trillions more in active mutual funds. I think we are many years away before the level of assets under management tied to fundamentally-weighted indexes can make a meaningful impact on the overall prices of stocks in the market. So I think we are a very long way away from any kind of equilibrium that would, in theory, arbitrage away price inefficiencies in stocks that may exist.
My questions overlap with Matthew's and Vincenzo's above. Matthew asks about the FTSE RAFI indices. Can you give some idea on the results of your work and how they compare with other fundamental indexation methodologies like that of Research Affiliates or even what Vincenzo outlines in his question. Also, any idea on what the potential "spread" of fees between traditional market cap weighted index ETFs will be versus fundamental weighted ETFs? Clearly the strength of the traditional ETF's case is in its low cost approach most exemplified by Vanguard. Thanks. Richard Kang
Since we have so many different indexes, measuring different regions and market capitalizations, I really am not able to generalize on how the returns of the WisdomTree indexes compare to specific indexes. So the best thing I can do is point you to information about the performance of our indexes available at wisdomtreeindexes.com. The FTSE/RAFI indexes you mentioned select, rank and weight stocks by a variety of fundamental metrics. Philosophically, we support that approach. However, we believe our approach is more transparent (our complete methodology is fully disclosed at wisdomtreeindexes.com) and easier to understand (since we focus on a single factor: dividends). We believe you are absolutely right in focusing on relatively low fees as one of the reasons for the success of traditional ETFs. This is an important area often overlooked by some investors. Expense ratios for WisdomTree ETFs are disclosed at wisdomtree.com. We invite you to draw your own conclusions as to whether the WisdomTree ETFs offer a meaningful advantage in terms of fees. If you wish to calculate “spreads,” you will need to do the math, depending on which cap-weighted ETF you choose to compare to.
I want to thank you and the Seeking Alpha team for the creation of a conversation between traders and industry leaders. I very much hope this is the first in a series of such forums.
My question builds on Roger Nusbaum's excellent query about international bond ETFs. There is a huge gap at present between those who trade positions (active retail and prop traders) and those who trade portfolios (hedge fund and bank traders; money managers). With the expanding universe of ETFs, I believe this gap will narrow and we will start to see individual traders becoming their own portfolio managers.
What education do you engage in and what education do you foresee in the near future to help the active trading world take advantage of what is literally a universe of trading possibilities, such as those mentioned by Roger?
Thanks again,
Brett Steenbarger
Going in an entirely different direction than the others, I want to talk about WisdomTree stock as an investment in and of itself. I look at your company as comparable to a biotech company with great drugs in the pipeline, drugs which had billion dollar market potential. I use this analogy because I believe the ETF industry is just in it's infancy, and I see billions if not trillions of dollars being moved from mutual and hedge funds into ETF's. My question is do you think my analogy has some merit?
I am a long term investor. What would you say is the added value of the WisdomTree small cap ETF over a low cost small cap value oriented fund?
Many thanks,
Niki Hermanson
To the Seeking Alpha Community:
I made a few additional posts below, that I actually posted earlier in the day. Thanks to all of your for questions. Sorry I could not get to answer all of them. They were great. I hope to interact with you again in the future.
Best,
Luciano
What are the separate roles of Wisdom Tree (advisor) and Bank of New York (sub-advisor) in maintaining the index going forward, selecting securities for the funds, daily monitoring and trading, etc? What is the experience of the key staff working on the funds at both Wisdom Tree and Bank of New York?
Thank you.
Richard Shaw
The WisdomTree Indexes were created by WisdomTree Investments after years of extensive research. As Director of Research, I work with a team of professionals to oversee the operation of the indexes. WisdomTree Asset Management, a registered investment adviser, oversees the operations of each ETF, including the portfolio management and the operation of the other service providers to the Funds. BNY Investment Advisors serves as the sub-advisor with respect to the day-to-day portfolio management and operations of each WisdomTree ETF. As sub-adviser, BNYIA is responsible for executing portfolio transactions. The WisdomTree indexes are calculated, maintained and disseminated by an independent index calculation agent. WisdomTree has been fortunate to attract seasoned management from within the ETF industry to help manage its ETF business. More information on WisdomTree’s role as investment adviser and BNY Investment Advisors role as sub-adviser can be found in the WisdomTree ETFs’ Statement of Additional Information or “SAI”. The SAI can be found on wisdomtree.com in the “Library” section.
Your website says: "The Index measures the performance of US companies, listed on the NYSE, AMEX or NASDAQ Global Market, that pay regular cash dividends and that meet other liquidity and capitalization requirements established by WisdomTree."
Would please expand on "other liquidity and capitalization requirments"
Thank you.
Richard Shaw
www.wisdomtreeindexes....
I am impressed by the way all the WisdomTree ETF's are responding based on the Monthly Performance report of Nov 30. Do you see these returns continuong steadily month to month or will the variations be dramatic month to month.
In specific would DBU, as a utility fund, be a constant performer?
Miles
I have two questions:
Given your firm's focus on dividends, I would think you would be interested in income oriented equity securities such as REITs, energy MLPs, and RIC BDCs such as Allied Capital and the like. Is there a reason why you would not consider launching products in these areas. Do you have any thoughts on why the ETF marketplace has not created any products using energy MLPs, which along with REITs, have been one of the top performing asset classes over the past ten years?
How does your dividend oriented philosophy account for the fact that corporations have increasingly used stock buybacks rather than dividend payments as a means of returning capital to shareholders. Doesn't the huge volume of share repurchase activity tend to distort the dividend yield measure of valuation?
Thanks,
J.D. Steinhilber
AgileInvesting.com