How Does BGI's New Dividend ETF Stack Up Against WisdomTree's Offerings?

Barclays Global Investors [BGI] launched a new, globally focused dividend exchange-traded fund onto the New York Stock Exchange Arca unit on June 15. The iShares Dow Jones EPAC Select Dividend Index Fund (NYSE: IDV) tracks 100 of the highest-yielding equities in Europe, the Pacific, Asia and Canada. The underlying index boasts a strong 4.18% yield, well above the popular U.S. Select Dividend Index (3.35%). It is dominated by Financials exposure (43%), and by exposure to Australia (37%) and the U.K. (32%). The new ETF charges 50 basis points (0.50%) in expenses.

BGI is positioning this ETF as a major new innovation, using the advertising tag line, “Your search for a non-US dividend ETF is over.” Of course, WisdomTree has actually been offering international dividend ETFs for a full year now; coincidentally, the birthday of the original WisdomTree ETFs was June 16, 2006. The question for investors is how the new iShares IDV ETF compares with the comparable WisdomTree funds.

Compared With WisdomTree
WisdomTree offers two ETFs that directly compete with the iShares fund: the WisdomTree DEFA Fund (NYSE: DWM) and the WisdomTree DEFA High-Yielding Equity Fund (NYSE: DTH). Both track the performance of dividend-paying stocks in Europe, Far East Asia and Australasia, and both weight stocks by the cash value of dividends paid. The difference between the two ETFs is that DWM includes substantially all dividend-paying stocks, while DTH only includes the 30% with the highest dividend yield.

Number Of Components
One of the most obvious difference between the three funds is the number of components. The iShares fund focuses on the top 100 securities, while DTH holds 352 stocks (as of March 31, 2007) and DWM holds 570 (as of March 31, 2007).

The holding counts are a reflection of the fact htat each fund captures a very different segment of the market.

Weighting Scheme
One key difference between the WisdomTree funds and the iShares fund is the weighting scheme. The iShares ETF tracks a “dividend weighted” index, meaning components are weighted based on dividend yield. In contrast, the WisdomTree indexes weight stocks by the cash value of dividends paid (i.e., dividend yield X market cap).

In practice, this means that the Dow Jones fund has a slight small-cap tilt versus the WisdomTree funds. WisdomTree argues that its indexes are more “investable” and are better representations of the market. It's certainly true that DWM, the "core" WisdomTree fund, more closely resembles the benchmark MSCI EAFE (Europe, Australasia and Far East) index than do either IDV or DTH.

A Look At The Numbers
The differences in index methodology play out in notable statistical differences between the three indexes and funds.

Country Weights
One difference is that the Dow Jones/iShares index includes Canada, while the WisdomTree benchmarks do not. This isn’t a huge difference, however, as Canada has only a 2.4% weight in the Dow Jones index.

Much bigger differences exist at the macro level. For instance, as of March 31, 2007, the Dow Jones index had a 37% weight in Australia, while the WisdomTree DEFA index had a 9% weight and the WisdomTree DEFA High-Yielding Index had a 13% weight. Similarly, France made up 13% of WisdomTree’s DEFA index and 12% of its High Yield index, but had little-to-no representation in the Dow Jones benchmark.

The table below showcases the top five country weights for each index. The presence of Japan in DWM is noteworthy, as Japan is the second-largest country in the MSCI EAFE Index, but has little representation in either IDV or DTH.

Generally speaking, IDV is overweight Australia and Hong Kong, and underweight France, Japan and Germany, as compared with the WisdomTree ETFs.

The EAFE weights are listed for comparison.

Industry Weights
While all three funds have large exposures to Financials, other sector exposures differ substantially. Compared with the WisdomTree funds, for instance, IDV is overweight Industrials and underweight Telecom and Energy.The following data is as of June 15, 2007.

Expense Ratios
The expense ratios for the three funds are similar. IDV charges 0.50%, and the WisdomTree ETFs charge 0.48%.

Financial Ratios
The aforementioned differences in country and industry exposure are reflected in the underlying statistics for the funds. Chief among them is dividend yield, where IDV and DTH sport similar payouts, while the more diversified DWM has a lower yield.PLEASE NOTE: The following statistical comparisons look at data from different dates, using May 31, 2007 for the Dow Jones/iShares index and June 15, 2007 for the WisdomTree indexes. However, the WisdomTree indexes traded nearly flat from June 1 through June 15, so the numbers are realistically comparable. All numbers are for the indexes and not the actual ETFs.

Conclusion
The choice between these three funds comes down to what an investor wants to get out of the investment. The WisdomTree DEFA Fund (DWM) offers broad exposure that is more closely aligned with the benchmark MSCI EAFE index, while the new iShares EPAC Select Dividend (IDV) and WisdomTree DEFA High-Yielding Equity Fund (DTH) hone in on yield and generate high payouts at the expense of focused exposure. DWM could conceivably be used to replace EAFE in a portfolio, while IDV and DTH would be more appropriate for an income-focused allocation.