WisdomTree Canada’s ETFs Review

On July 14 2016, WisdomTree announced the launch of its first suite of ETFs in Canada. These products relfected some most latest trends of the ETF products developments: multi-facctors, dynamic currency hedge. It also provides a comprehensive geographic coverage: US, Europe, and International. Here are some summaries of the products and my comments.

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Source: WisdomTree Canada’s webiste https://www.wisdomtree.ca

1, US Quality Dividend Growth ETFs DGR/DGR.B/DQD

1.1 The index methodology/investment universe starts from a base index “WisdomTree Dividen Index (DI)”. DI has several criteria: (1) US headquartered companies; (2) listed on NYSE or NASDAQ; (3) pay regular cash dividends on common stock shares; (4) market cap above US$ 100 million; (5) daily trading volume above US$ 100,000.

1.2 US Quality Dividen Growth Index has some further requirements: (1) market cap above US$ 2 billion, which is much higher than the DI requirement; (2)Earnings yield higer than dividend yield.

1.3 US Quality Dividen Growth Index factor weithging rule: (1) 50% weighted to the rank of long term earnings growth; (2) 25% weighted to the rank of historical 3 year average ROE; (3) 25% weighted to the rank of historical 3 year average ROA. We can conclude that it’s 50% to the past and 50% to the future, overall it’s focused on earnings growth.

1.4. Top 300 hundered stocks are chosen. Any single sector’s exposure is capped by 25%.

1.5 The holdings only cover 7 sectors and concentrated in 4 sectors: industrial 20.60%, consumer discretionary 19.77%, information technology 19.35%, consumer staples 18.23%. Financials only account 3.41%. Three industries are missed: energy, utilities, and telecom. (While in 2016, energy and utilities are best performers in US market).

1.6 Dynamic hedging strategy: based on 3 factors of the currency pair of USD/CAD: (1) momentum, (2) interest rate differentials, and (3) value, the hedge ratio could be 0.0.0%, 16.67%, 33.33%, 50%, 67.67%, 83.33% or 100.00%

1.7 Based on the same index, while different currency hedging strategies, the company provides 3 version of the products: (1)DGR, no currency hedge, unit holders are exposed to the fluctuation of USD/CAD; (2)DGR.B, fully hedged, clients will only get the return of the index itself; (3) DQD, dynamically hedged, a strategy with its effectiveness hasn’t been proofed by the market. These three version provide good optionalbility for investors and advisors.

1.8 This product’s index methodology and numbers of holdings let me recall another similar product: GSLC, Goldman & Sachs US ActiveBeta Large Cap ETF, while the latter uses 4 different factors: value, momentum, quality and low volatility. GSLC has 400 holdings. GSLC is listed in US, so it has no currency hedge necessity.

2, US High Dividend Index ETFs HID/HID.B

2.1, The index is derived from the base index DI. A few more criteria were added to filter the stocks in the DI investment universe: (1) market cap above US$ 2 million; (2) average daily trading volume above US$ 200,000. Then the component companies rank in the top 30% by indicated annual dividend yeild are selected.

2.2, Current holdings cover all 10 sectors (which is different from the US Quality Dividend Growth ETFs), the first 3 sectors are: consumer staples 17.73%, energy 15.65%, financials 13.74%. As the index methodology focused on pure curren dividend payments, growth factor is not considered. Its top ten holdings are all traditional big names, no technology companies, this is quite different from DGR/DGR.B/DQD.

2.3, This fund holds 431 stocks, 130 more than DGR/DGR.B/DQD.

3, WisdomTree International Quality Dividend Growth products IQD/IQD.B/DQI

3.1 The base index WisdomTree International Equity Index’s screening criteria. It covers dividend paying companies in Japan, the 15 European countries, Australia, Israel, New Zealand, Hong Kong or Singapore. Some screening criteria: (1) annual dividen payouts at least US$ 5 million; (2) market cap at least US$ 100 million; (3) average trading volume at least US$ 100,000.

3.2 The WisdomTree International Quality Dividend Growth Index is derived from the base index and comprises 300 companies from the base index. It filtered furthur by some more strict criteria: (1) market cap at least US$ 1 billion; (2) earnings yield greater than the dividend yield;

3.3 Weighting method is the same as US Quality Dividend Growth ETFs. Eligible companies are ranked using a weighted combination of three factors: 50% weighted to the rank of long-term estimated earnings growth, 25% weighted to the rank of the historical three-year average return on equity, and 25% weighted to the rank of the historical three-year average return on assets. Top 300 companies by this combined ranking will be selected for inclusion. Currently it holds 220 companies.

3.4  Based on the index, there are 3 dfferent version of ETFs: (1) unhedged IQD; (2) fully hedged IQD.B; (3) dynamically hedged DQI. Dynamic hedging strategy: based on 3 factors of the currency pair of USD/CAD: (1) momentum, (2) interest rate differentials, and (3) value, the hedge ratio could be 0.0.0%, 16.67%, 33.33%, 50%, 67.67%, 83.33% or 100.00%.

3.5 Sector breakdown. 8 sectors are covered. Highly concentrated on Consumer Discretionary, Consumer Staples, Healthcare, and Industrials. No energy companies.

3.6 Country allocation. 20 countries are covered. Countries have more than 10% allocaions are (1) UK 19.61%; (2) Switzerland 12.23%; (3) Netherland 10.98%; (4) Japan 10.38%.

4, WisdomTree Europe Hedged Equity Index ETF EHE

4.1 Index methodology. The index is derived from the base index WisdomTree International Equity Index and add some criteria: (1) listed in Europe exchanges, UK is not included; (2) Companies must be domiciled in Europe and traded in Euros, so the hedge is only related to EUR/CAD; (3) derive at least 50% of their revenue from countries outside of Europe, this is a very special and critical requirement; (4) annual dividend payout at least US$ 5 million; (5) market cap at least US$ 1 billion.

4.2 Sector breakdown. It consists of 9 sectors and the top 3 sectors are: (1) consumer staples, 19.66%; (2) industrials, 17.85%; (3) consumer discretionary, 17.43%.

4.3 Country allocation. It covers 10 euro zone countries, France is the largest component, accounts for 25.24%; Germany is the second largest with 25.13%.

5. Some comments

5.1 It is very good to see a major US player comes to the Canadian market. There are some new entrants this year, but not as established as WisdomTree. It’s positive for the industry’s long term development.

5.2 Distribution is the key. Asset gathering is very critical for new ETFs. In Canadian market, except some first mover (such as iShares and BMO), I belive big banks and insurance companies will get the lion’s share in the ETF market gradually, because they have superior distribution capability. New and small ETF issuers will be struggling with asset gathering. We have already see the low AUM and trading volume of the products of small issuers.

5.3 Time of entry. The time WisdomTree launched their products is just when US markets reaches new highs. Europe is still facing challenges of more countries will exit European Union. Investors are concerned about the global equity markets. As an investor, I will not add any long term positions at current price. If the market has material correction in the second half of this year, asset gathering will be more difficult. But I belive WisdomTree has already taken in all these headwind factors.


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