Completing Emerging Market Equity Allocations with Small Caps

Transcription

1 WisdomTree ETFs EMERGING MARKETS SMALLCAP DIVIDEND FUND DGS Completing Emerging Market Equity Allocations with Small Caps The world economy is increasingly powered by the evolution of the emerging market consumer and growing manufacturing base. At the same time, consumers in developed countries are plagued by slower economic growth as their economies experience a deleveraging process. This new normal global economy has implications for global consumption trends most especially in the developed world. 1 So, how do investors position their portfolios to take advantage of this trend? The most common way investors have been accessing the emerging markets is through large-cap index funds. + Small caps have more direct access to local consumer sectors and local economies + Small caps have a unique and different country mix, compared to large caps + Small caps offer potential for greater growth opportunities than large caps These three benefits have consistently translated into strong historical performance for emerging market small caps. WisdomTree believes these characteristics will continue to add up to strong performance potential going forward as well, so long as investors are cognizant of some common pitfalls to small-cap investing. 2 SMALL-CAP STOCKS AND THE VALUE PREMIUM In general, small-cap stocks often sell at higher valuations than large caps because they are viewed as having more long-term growth opportunities. In other words, small caps naturally contain a growth bias. So, why is this important? Academic research, most notably conducted by Eugene Fama and Kenneth French, sets forth the concept that the returns of stocks are often a function of their exposures to various risk premiums. In theory, these risk premiums provide additional returns for small-cap stocks over large-cap stocks and value stocks over growth stocks. In fact, the historical returns in emerging markets over the past decade bear these theories out, illustrating that the value premium the additional return one can expect from value stocks over growth stocks was more evident in small caps than in large caps. In fact, the value premium in emerging market small caps was even greater than that of small caps in the United States. 1 The term new normal was coined by PIMCO to express their view of global growth prospects. 2 Source: WisdomTree

2 Over the past 10 years, returns for the MSCI Emerging Markets Index family have demonstrated interesting historical premiums for size and value exposures: + Size Premium The small-cap index outperformed the large cap by 206 basis points on a 10-year basis. + Value Premium In small caps, the value premium was wider than in large caps, as small-cap value stocks outperformed small-cap growth stocks by 250 basis points on a 10-year basis. INDEX PERFORMANCE: AVERAGE ANNUAL RETURNS [ as of March 31, 2016 ] YTD 1-Year 3-Year 5-Year 10-Year MSCI Emerging Markets Index 5.71% % -4.50% -4.13% 3.02% MSCI Emerging Markets Small Cap Index 0.97% -9.20% -2.69% -2.56% 5.08% Small Cap Minus Large Cap -4.74% 2.83% 1.81% 1.57% 2.06% MSCI Emerging Markets SmallCap Value Index 3.14% -8.08% -2.94% -2.81% 6.31% MSCI Emerging Markets SmallCap Growth Index -1.17% % -2.48% -2.33% 3.81% Small-Cap Value Minus Small-Cap Growth 4.31% 2.28% -0.46% -0.48% 2.50% Sources: WisdomTree, Zephyr StyleADVISOR. Past performance does not guarantee future results. You cannot invest directly in an Index. Index performance does not represent actual fund or portfolio performance. A fund or portfolio may differ significantly from the securities included in the Index. Index performance assumes reinvestment of dividends but does not reflect any management fees, transaction costs or other expenses that would be incurred by a portfolio or fund, or brokerage commissions on transactions in Fund shares. Such fees, expenses and commissions could reduce returns. A SMART WAY TO ACCESS EMERGING MARKET SMALL CAPS As investors look to increase their allocations to leverage the global growth of the emerging markets, WisdomTree believes the WisdomTree Emerging Markets SmallCap Fund (DGS) represents an attractive opportunity to participate in this market segment. DGS: + Provides direct access to local consumer sectors and local economies + Offers a unique country mix + Can enhance the small cap and value premiums through dividend weighting + Has a strong history of performance 3 Basis point: 1/100th of 1 percent.

3 DGS OFFERS GREATER EXPOSURE TO THE EMERGING MARKET CONSUMER Very few of the stocks in large-cap emerging market funds represent access to the emerging market consumer or manufacturing stocks that are becoming the growth engine of the global economy. As of March 31, 2016, the MSCI Emerging Markets Index, a traditional capweighted emerging market equity benchmark, had approximately 14.6% exposure to the Energy and Materials sectors, which have declined noticeably as questions about global economic growth arise. However, appealing long-term trends appear to be intact in the emerging markets with favorable demographics and relatively positive balance sheets compared to developed economies, which bodes well for the consumer base and manufacturing industries. As of March 31, 2016, DGS had over 43 the portfolio s investments in those two encouraging themes. Consumer Discretionary and Staples accounted for roughly half of the exposure and Industrials accounted for the rest. DGS ATTRIBUTION RETURNS SINCE FUND INCEPTION [ October 30, 2007 March 31, 2016 ] Sector Average Weight Consumer Discretionary 15.41% 4.89% Consumer Staples 8.23% 11.78% Energy 2.39% -4.15% Financials 20.17% 2.02% Health Care 2.19% 12.60% Industrials 19.20% -2.28% Information Technology 14.43% 0.02% Materials 11.23% -0.65% Telecommunication Services 1.07% % Utilities 5.69% 3.83% Sources: WisdomTree, Bank of New York Mellon. AVERAGE ANNUAL TOTAL RETURNS [ as of March 31, 2016 ] Fund Information NAV (%) Market Price (%) Ticker Expense Ratio Inception Date YTD 1-Year 3-Year 5-Year Since Inception YTD 1-Year 3-Year 5-Year Since Inception WisdomTree Emerging Markets SmallCap Fund-DGS MSCI Emerging Markets SmallCap Index DGS 0.63% 10/30/ % % -6.70% -3.51% -0.34% 7.70% % -7.06% -3.65% -0.37% 0.97% -9.20% -2.69% -2.56% -1.24% 0.97% -9.20% -2.69% -2.56% -1.24% Performance is historical and does not guarantee future results. Current performance may be lower or higher than quoted. Investment returns and principal value of an investment will fluctuate so that an investor s shares, when redeemed, may be worth more or less than their original cost. Performance data for the most recent month-end is available at

4 DGS OFFERS UNIQUE COUNTRY EXPOSURE DGS provides significant exposure to some emerging market countries that are often overlooked in large-cap portfolios. For example, the MSCI Emerging Markets Index tends to have greater exposure to Brazil, Russia, India and China, which combine to approximately 41% the weight of the index. In DGS since inception, the average exposure to those four countries has represented about 13 the portfolio. Instead, since inception among the top five countries in DGS, there has been significant weight in Taiwan, Thailand and South Africa. Malaysia and Turkey are two countries that received more weight in DGS than traditional indexes. TEN LARGEST COUNTRY ATTRIBUTION RETURNS SINCE DGS FUND INCEPTION [ October 30, 2007 March 31, 2016 ] Portfolio Average Weight Portfolio Taiwan 26.31% 0.91% South Africa 10.72% 5.32% Thailand 9.87% 12.14% South Korea 9.50% 0.72% Malaysia 7.73% 4.55% Brazil 6.39% -4.78% China 5.35% -2.77% Turkey 5.20% 1.73% Chile 3.32% 1.96% Indonesia 2.84% 3.61% Sources: WisdomTree, Bank of New York Mellon WISDOMTREE AMPLIFIES SIZE AND VALUE PREMIUMS The index DGS is designed to track was created with a rules-based methodology to introduce a value tilt to emerging market small caps by shifting weight to those stocks selling at lower valuation multiples 4 (the high-dividend yielders.) A market cap-weighted index magnifies the weight of the more richly valued stocks or countries; that is, for two stocks with the same level of earnings, a market Weighting Method Over-weights Stocks with cap-weighted index will give the greatest weight to Higher Valuation Multiples the stock with the highest P/E ratio. Market Cap Weighting Lower Yields WisdomTree s dividend-weighted indexes allocate Lower Valuation Multiples Weighting weights to stocks and countries by treating all Higher Yields dividends equally. THE DIFFERENCE DIVIDEND WEIGHTING MAKES WisdomTree believes its weighing methodology has positive implications for the dividend income generated by its indexes, and the below example illustrates how this is accomplished. In the following hypothetical example, the dividend-weighted three stock portfolio generates approximately 30% more dividend income and almost 1% of additional dividend yield 5 than the market cap-weighted option. What s more, it did this using the same three stocks and the same initial investment. 4 Valuation multiple: A measure of a company s share price relative to a financial metric, which could include dividends or earnings. 5 yield: A financial ratio that shows how much a company pays out in dividends each year relative to its share price.

5 THE DIFFERENCE DIVIDEND WEIGHTING MAKES Company Market Cap (Millions) Stream (Millions) Yield Market Cap Weight Investment Income Weight Investment Income A $2,000 $50 2.5% 50% $50,000 $1,250 40% $40,000 $1,000 B $1,000 $15 1.5% 25% $25,000 $375 12% $12,000 $180 C $1,000 $60 6.0% 25% $25,000 $1,500 48% $48,000 $2,880 s $4,000 $125 $100,000 $3,125 $100,000 $4,060 This hypothetical example shows how different stocks might be weighted using market cap-weighting and dividend weighting. It is not reflective of any actual index or fund and is for illustrative purposes only. DGS DELIVERS STRONG PERFORMANCE HISTORY AND POTENTIAL WisdomTree believes its rules-based indexing methodology tends to deliver results that are especially well suited for inefficient markets where there is a lot of volatility. The track record for DGS illustrates this well, as it was launched just prior to a period of enormous volatility significant declines in 2008 were followed by a meaningful rebound in 2009 and Despite a challenging environment in 2011, DGS performed admirably during the period and has built up an impressive track record. + As of March 31, 2016, DGS received the 3-Star Overall Morningstar Rating. + Since inception through March 31, 2016, DGS beat 93 the emerging markets funds in the U.S. OE Diversified Emerging Markets and U.S. ETF Diversified Emerging Markets Universe peer group, ranking 17 out of 232 managers. 6 Morningstar Fund Category: US ETF & OE Diversified Emerging Markets WisdomTree Emerging Markets SmallCap Fund 1-Year 3-Year 5-Year 11/1/07 3/31/ % 41% % 19% % 57% % 93% 17 MSCI Emerging Markets Index % 44% % 52% % 46% % 59% 97 # of s in Fund Category Source: Morningstar. Past performance does not guarantee future results. Fund Market Price Data as of 3/31/2016. s do not include front end loads. Morningstar proprietary ratings reflect historical risk-adjusted performance as of March 31, The Overall Morningstar Rating for a fund is derived from a weighted average of the performance figures associated with its three-, five- and ten-year (if applicable) Morningstar Rating metrics Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance, rankings and ratings are no guarantee of future results. The Percent in Category is the fund s total-return percentile rank relative to all funds within the same Morningstar Category and is subject to change each month. Regarding ranking of funds, 1 = Best. 6 Source: Morningstar 7 The U.S. OE Diversified Emerging Markets category is all the open-ended mutual funds that Morningstar categorizes as Diversified Emerging Markets funds.

6 For more information about how DGS or any of WisdomTree s Emerging Markets ETFs can help investors leverage the new engine of global growth, visit wisdomtree.com. Unless otherwise stated, datasource is WisdomTree. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure emerging markets equity performance. The MSCI Emerging Markets Small Cap Index is a free float-adjusted market capitalization index that is designed to measure the performance of small-capitalization equities in the emerging markets.the MSCI Emerging Markets Small Cap Value Index is a free floatadjusted market capitalization index that is designed to measure the performance of value small-capitalization equities in the emerging markets. The MSCI Emerging Markets Small Cap Growth Index is a free float-adjusted market capitalization index that is designed to measure the performance of growth small-capitalization equities in the emerging markets. The MSCI Emerging Markets Value Index is a free floatadjusted market capitalization index that is designed to measure the performance of value stocks within the MSCI Emerging Markets Index. The MSCI Emerging Markets Growth Index is a free float-adjusted market capitalization index that is designed to measure the performance of growth stocks within the MSCI Emerging Markets Index. Investors should carefully consider the investment objectives, risks, charges and expenses of the Fund before investing. To obtain a prospectus containing this and other important information, call WISE (9473) or visit wisdomtree.com. Read the prospectus carefully before you invest. Past performance does not guarantee future results. There are risks associated with investing, including possible loss of principal. Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty. Funds focusing on a single sector and/or smaller companies generally experience greater price volatility. Investments in emerging, offshore or frontier markets are generally less liquid and less efficient than investments in developed markets and are subject to additional risks, such as risks of adverse governmental regulation, intervention and political developments. Due to the investment strategy of this Fund it may make higher capital gain distributions than other ETFs. Please read the Fund s prospectus for specific details regarding the Fund s risk profile. WisdomTree Funds are distributed by Foreside Fund Services, LLC, in the U.S. only WisdomTree Investments, Inc. WisdomTree is a registered mark of WisdomTree Investments, Inc. WTGM-0776