By Jeremy Schwartz
During 2014 we've noticed that large caps tended to outperform both mid-caps and small caps in U.S. equity markets. While there are a lot of active managers focused on different ways to select and build portfolios of U.S. large caps, exchange-traded funds (ETFs) designed to track the returns of large-cap indexes after costs, fees and expenses are also becoming more prevalent.
To illustrate how the two approaches compare, we looked at how the WisdomTree LargeCap Dividend Fund (NYSEARCA:DLN) has done against active managers in 2014. We chose DLN because by design it provides exposure to some of the largest dividend-paying companies in the U.S.
For definitions of terms and Indexes in the chart, visit our glossary.
DLN Outperformed More Than 91% of Large-Cap Active Managers in 2014: For the year-to-date period through October 31, 2014, DLN's performance against U.S. large-cap active managers was impressive. We believe the primary reason for this is that DLN has more than 99% of its weight in securities greater than $10 billion in market capitalization. Large-cap U.S. stocks have been performing well, and DLN by design does not have exposure to other market capitalization size segments.
2008 or 2009? Something we've heard over time is that in tough markets active managers can potentially take a portion of their assets and go into cash, thereby providing a mitigation of downside risk. For this reason you may think active managers would have tended to outperform DLN in 2008, but that was not the case. As a matter of fact, DLN outperformed nearly 72% of the large-cap active managers in 2008. One caveat is that DLN tends to participate less on the upside. For example, the Fund faced a much greater headwind from its competition in 2009, when it beat less than 10% of large-cap active managers.
What Happened in 2011? DLN beat almost 99% of active managers in 2011-a much higher percentage than either of its market capitalization-weighted benchmarks. Focusing on dividends during this period led to a less than 10% average weight to Financials, a sector that tended to be much more heavily represented within the market capitalization-weighted benchmarks. Within both of these benchmark Indexes, Financials was one of the worst-performing sectors during this period, so DLN's under-weight to this sector was helpful to relative returns.
Learn about our approach to dividends, read "The Dividends of a Dividend Approach" white paper.
Important Risks Related to this Article
There are risks associated with investing, including possible loss of principal. Funds focusing their investments on certain sectors increase their vulnerability to any single economic or regulatory development. This may result in greater share price volatility. Please read the Fund's prospectus for specific details regarding the Fund's risk profile.
Dividends are not guaranteed, and a company's future ability to pay dividends may be limited. A company currently paying dividends may cease paying dividends at any time.
High double-digit returns were achieved primarily during favorable market conditions. Investors should not expect that such favorable returns can be consistently achieved. A fund's performance, especially for short periods, should not be the sole factor in your investment decision.
Jeremy Schwartz, Director of Research
As WisdomTree's Director of Research, Jeremy Schwartz offers timely ideas and timeless wisdom on a bi-monthly basis. Prior to joining WisdomTree, Jeremy was Professor Jeremy Siegel's head research assistant and helped with the research and writing of Stocks for the Long Run and The Future for Investors. He is also the co-author of the Financial Analysts Journal paper "What Happened to the Original Stocks in the S&P 500?" and the Wall Street Journal article "The Great American Bond Bubble."