WisdomTree ETFs WISDOMTREE HIGH DIVIDEND FUND DHS Nearly 10 years ago, WisdomTree launched its first dividend-focused strategies based on our extensive research regarding the importance of focusing on fundamentals 1, rather than market capitalization 2, for weighting indexes. And since June 2006, those strategies have been tested through some unprecedented market events. Since the 2008 2009 global financial crisis, the S&P 500 Index has undergone a largely sustained rally. At this time, we believe we might be entering the later stages of this bull market 3 rally a time when investors may appreciate more defensive 4, higher-dividend-paying exposures, as opposed to positioning that can be more cyclical 5 and momentum 6 driven. The WisdomTree High Dividend Fund (DHS) embodies this type of defensive exposure. The Fund tracks the returns of the WisdomTree High Dividend Index before fees and is designed to deliver income and growth potential through exposure to high-dividend-yielding U.S. companies. In the following analysis, we will review the core tenets of the WisdomTree High Dividend Index, its methodology and its impressive, real-time returns. We find it interesting that the first quarter of 2016 has provided somewhat of a real-time study of a period when tilting toward more defensive exposure has performed well versus more traditional market cap-weighted indexes like the S&P 500 and Russell 1000. FIGURE 1: FIRST-QUARTER 2016 FAVORED HIGH DIVIDEND POSITIONING Avg. Ann. Return 16% 14% 12% 1 8% 6% 4% 2% 11.3% 8.1% 8.4% 1.8% 1.3% 1.6% 13.6% 11.8% 11.6% 10.2% 9.4% WT High Dividend Index S&P 500 Index Russel 1000 Value Index 6.6% 7.3% 5.8% -2% -4% -1.5% Year-to-Date 1-Year 3-Year 5-Year Since WT Index Inception Source: Bloomberg, with data from 6/1/06. WisdomTree Index inception to 3/31/16. Past performance is not indicative of future results. You cannot invest directly in an index.. 1 Fundamentals: Attributes related to a company s actual operations and production as opposed to changes in share price. 2 Market capitalization: Market cap = share price x number of shares outstanding. 3 Bull market: A long term series upward or bullish movements in a market where the average upward move outpaces that of the average downward move. 4 Defensive: Sectors that comprise equities that tend to contract less when gross domestic product (GDP) and markets experience a downturn, as demand for their goods and services remains; typically defined as Consumer Staples, Health Care, Telecommunication Services and Utilities. 5 Cyclical: Sectors are Consumer Discretionary, Energy, Financials, Industrials, Information Technology and Materials. 6 Momentum: Characterized by high sensitivity to sentiment and perception of potential, with lower sensitivity to actual business operations.
FOCUSING ON FUNDAMENTALS REDUCED RISK AND ENHANCED PERFORMANCE One of the common challenges with market capitalization weighting is that it tends to over-weight overvalued stocks and under-weight undervalued ones. Professor Jeremy Siegel, in his book, The Future for Investors, illustrates the importance of both focusing on fundamentals and reducing the risk 7 of being exposed to overvalued stocks over long periods. By sorting the S&P 500 Index into quintiles 8 based on dividends (ranked from highest payers to lowest) and rebalancing on an annual basis, we find that higher dividend yield quintiles: 1. Significantly outperformed the S&P 500 and the lower dividend payers 2. Had lower risk than the S&P 500 Index and the lower dividend payers FIGURE 2: MITIGATING THE RISK OF EXPOSURE TO EXPENSIVE VALUATIONS HAS PAID DIVIDENDS $1,000,000 $970,606 $855,859 Lowest Low Mid High Highest S&P 500 $307,868 $211,633 $200,895 $153,502 $100,000 Growth of $1,000 $10,000 $1,000 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 Dividend Yield Return (p.a.) Beta Highest 12.6% 0.93 High 12.4% 0.83 Mid 9.7% 0.92 Low 9.1% 1.07 Lowest 9.6% 1.24 S&P 500 Index 10.4% 1.00 2001 2003 2005 2007 2009 2011 2013 Source: Professor Jeremy Siegel, The Future for Investors, with updates through 12/31/15. You cannot invest directly in an index. Past performance is not indicative of future results. Data from 12/31/1957 to 12/31/2015. Each stock in the S&P 500 is ranked from highest to lowest by dividend yield on December 31 of every year and placed into quintiles, baskets of stocks, with 100 stocks in each basket. The stocks in the quintiles are weighted by their market capitalization. The dividend yield is defined as each stock s annual dividends per share divided by its stock price as of December 31 of that year. 2015 7 Risk: Also standard deviation, which measures the spread of actual returns around an average return during a specific period. Higher risk indicates greater potential for returns to be farther away from this average. 8 Quintiles: Classification into five groups based on ranking, with an equal number of values in each group.
INTRODUCING WISDOMTREE S HIGH DIVIDEND APPROACH The risk-adjusted outperformance demonstrated by Professor Siegel s research is the foundation upon which the WisdomTree High Dividend Index was built. At its core, the methodology focuses on: + Stock Selection: From the initial universe of all U.S. dividend-paying companies meeting WisdomTree s market capitalization and liquidity requirements, the top 3, ranked on the basis of dividend yield, are selected. + Weighting: Once these firms are selected, they are weighted on the basis of the cash dividends that they pay. Although firms in the WisdomTree High Dividend Index must demonstrate relatively higher dividend yields 9, this is not a yield-weighted Index the firms with the largest weights are those that are paying out the largest amounts of cash dividends. As figure 3 illustrates, when compared to the S&P 500, the WisdomTree High Dividend Index has two-thirds of its weight in the highest quintile and the balance in the high quintile, with no weight given to mid, low, lowest or non-dividend payers. FIGURE 3: WEIGHT IN S&P 500 DIVIDEND YIELD QUINTILES 8 7 6 66.7% WT High Dividend Index WT Dividend Index S&P 500 Index Index Weight 5 4 3 2 1 34.2% 33.3% 26.2% 20.3% 22. 17.9% 17.9% 15.4% 11.8% 13.9% 14.2% 6.3% 0. 0. 0. 0. 0. Highest High Mid Low Lowest Non-Dividend Payer Sources: WisdomTree, Bloomberg, with data as of 11/30/15 Index screening date. You cannot invest directly in an index. Subject to change. 9 Dividend yield: Dividends over the prior 12 months are added together and divided by the current share price. Higher values indicate more dividends are being generated per unit of share price.
A METHODOLOGY THAT TILTS TOTAL RETURNS TOWARD DIVIDENDS Most equity indexes have two components driving total returns price return and dividend return. The price return reflects changes in the share prices of the underlying constituents, and the dividend return is a result of dividend payments. Dividend-focused methodologies tilt the profile of total returns toward the dividend component. Over the nearly 10 years since launch: + Price Returns Were Challenged for Value Strategies: Due to its focus on relatively higher-yielding dividend payers in the United States, it could be said that the WisdomTree High Dividend Index tilts toward the value 10 side of the style spectrum. This Index, along with the Russell 1000 Value, had price returns that lagged those of the S&P 500 Index over the period. Why? Quite simply, growth 11 outperformed value and the S&P 500 Index contains elements of both styles. + Dividends Show a Different Story: In these hypothetical investments, there wasn t a significant difference between the dividends of the S&P 500 Index and those of the Russell 1000 Value Index. The dividends for the WisdomTree High Dividend Index, however, were approximately $1,400 to $1,600 higher. It is interesting to note that even in a period in which the overall focus on value was out of favor, the tilt toward higher dividends still delivered. FIGURE 4: DIVIDEND VS. PRICE RETURNS ON A HYPOTHETICAL $10,000 Change/Impact on Hypothetical $10,000 $18,000 $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $12,120 $16,217 $13,551 $3,969 $2,389 WT High Dividend Index S&P 500 Index Russel 1000 Value Index $2,598 $2,000 Price Impact Hypothetical Dividends Source: Bloomberg, for period 6/1/06 to 3/31/16. You cannot invest directly in an index. Past performance is not indicative of future results. 10 Value: Characterized by lower price levels relative to fundamentals, such as earnings or dividends. Prices are lower because investors are less certain of the performance of these fundamentals in the future. 11 Growth: Characterized by higher price levels relative to fundamentals, such as dividends or earnings. Price levels are higher because investors are willing to pay more due to their expectations of future improvements in these fundamentals.
A METHODOLOGY THAT PROVIDES EXPOSURE TO DEFENSIVE SECTORS Certain sectors tend toward relatively higher dividend yields than others, so it s no surprise that the WisdomTree High Dividend Index has higher exposure to defensive sectors than many other indexes which may make it ideally suited for bear markets and later stages of bull markets, like now. FIGURE 5: WISDOMTREE HIGH DIVIDEND INDEX IS MORE EXPOSED TO DEFENSIVE SECTORS 8 Cyclical Sectors Defensive Sectors 7 65.1% 66.4% 69.1% 71.6% 6 53.9% Index Weight 5 4 3 46.1% 34.9% 33.6% 30.9% 28.4% 2 1 WT High Dividend WT Dividend S&P 500 Value S&P 500 S&P 500 Growth Source: Bloomberg, with data as of 3/31/16. You cannot invest directly in an index. Subject to change. Cyclical sectors are Consumer Discretionary, Energy, Financials, Industrials, Information Technology and Materials. Defensive sectors are Consumer Staples, Health Care, Telecommunication Services and Utilities.
WISDOMTREE HIGH DIVIDEND INDEX IS MORE EXPOSED TO DEFENSIVE SECTORS We are truly excited to be able to look at nearly 10 years of live history to examine how this approach has done in real time. + Performance over the Short Term: Many think of a high dividend approach as just another value strategy. So we find it interesting that over 2016 s first quarter and over the last year a somewhat defensive period when value tends to outperform the WisdomTree High Dividend Index significantly outperformed the Russell 1000 Value Index. + The Phenomenal Five Years: Over the five years ending March 31, 2016, the WisdomTree High Dividend Index delivered a return stronger than the S&P 500 Index with a single-digit average annual volatility AND a beta of 0.68. + Strong Risk/Return Characteristics: Over the one-, three- and five-year periods, the WisdomTree High Dividend Index outperformed the Russell 1000 Value Index with lower average annual risk. In fact, the WisdomTree High Dividend Index outperformed the Russell 1000 Value Index over EVERY period shown in figure 6.
FIGURE 6: UNDERSTANDING THE RISK/RETURN TRADE-OFFS OVER TIME Relative to S&P 500 Index Period Index Avg. Ann. Return Avg. Ann. Std. Dev. Sharpe Ratio Up Capture Down Capture Beta Correlation 1-Year 3-Year 5-Year 6/1/2006 to 3/31/2016 WisdomTree High Dividend Index 8.38% 13.26% 0.63 86.1 52.2 0.84 0.93 Russell 1000 Value Index -2.28% 14.45% -0.16 86.26% 108.51% 0.98 0.99 S&P 500 Index 1.78% 14.66% 0.12 100.0 100.0 1.00 1.00 WisdomTree High Dividend Index 11.27% 10.05% 1.12 78.17% 69.41% 0.77 0.88 Russell 1000 Value Index 8.6 11.4 0.75 90.81% 109.21% 0.99 0.98 S&P 500 Index 11.82% 11.35% 1.04 100.0 100.0 1.00 1.00 WisdomTree High Dividend Index 13.61% 9.87% 1.37 79.58% 54.97% 0.68 0.85 Russell 1000 Value Index 9.44% 12.67% 0.74 96.57% 108.96% 1.02 0.98 S&P 500 Index 11.58% 12.22% 0.94 100.0 100.0 1.00 1.00 WisdomTree High Dividend Index 6.65% 17.5 0.32 90.06% 93.42% 0.97 0.85 Russell 1000 Value Index 5.02% 16.21% 0.25 97.89% 107.62% 1.04 0.99 S&P 500 Index 7.3 15.37% 0.41 100.0 100.0 1.00 1.00 Standard deviation: A measure of how widely an investment or investment strategy s returns move compared to its average returns for an observed period. A higher value implies more risk, in that there is more of a chance the actual return observed is farther away from the average return. Sharpe ratio: Measure of risk-adjusted return. Higher values indicate greater return per unit of risk, specifically standard deviation, which is viewed as being desirable. Up capture: A risk statistic measuring the propensity of an index or investment vehicle to deliver positive returns when an underlying benchmark is delivering positive returns. Higher values indicate greater magnitudes of positive returns relative to this benchmark. Down capture: A risk statistic measuring the propensity of an index or investment vehicle to deliver negative returns when an underlying benchmark is delivering negative returns. Higher values indicate greater magnitudes of negative returns relative to this benchmark. Beta: Measure of the volatility of an index or investment relative to a benchmark. A reading of 1.00 indicates that the investment has moved in lockstep with the benchmark; a reading of -1.00 indicates that the investment has moved in the exact opposite direction of the benchmark. Correlation: Statistical measure of how two sets of returns move in relation to each other. Correlation coefficients range from -1 to 1. A correlation of 1 means the two subjects of analysis move in lockstep with each other. A correlation of -1 means the two subjects of analysis have moved in exactly opposite directions. Sources: Bloomberg, Zephyr StyleADVISOR, for period from 6/1/06 to 3/31/16. You cannot invest directly in an index. Past performance is not indicative of future results. 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.
PLACING THE TRACK RECORD IN APPROPRIATE HISTORICAL CONTEXT The one-, three- and five-year risk statistics be it average annual standard deviation or beta compared to the S&P 500 Index look very different from the since inception figure. Why? At its inception, the WisdomTree High Dividend Index had no caps on either constituent or sector exposures. So: + The financial sector made up approximately one-third of the total cash dividends paid in the United States as of the 2007 screening date. 12 + These financial companies had relatively higher yields, qualifying for the WisdomTree High Dividend Index and ultimately constituting more than 5 13 of the Index in 2008. + This extreme over-weight to Financials is responsible for the increased risk in the since inception period. At the November 30, 2012, screening date, new constituent- and sector-capping rules were put in place 5% for any individual constituent and 25% for any individual sector. It is, however, worth noting that the Financials sector hasn t breached a level of 2 since after the global financial crisis. In fact, no sector has because the Dividend Stream 14 itself has become more balanced. Understanding High Dividend Financials of Today Focusing on high dividends within the WisdomTree High Dividend Index has led to a completely different type of Financials exposure as of March 31, 2016, compared to the S&P 500 Index, although the aggregate sector exposures are similar. + Predominantly Real Estate: Nearly all the weight in Financials in the WisdomTree High Dividend Index was in real estate, whereas the exposures in Financials for the S&P 500 Index were much more evenly distributed. + Smaller Market Capitalizations: The WisdomTree High Dividend Index had an average market cap of $3.9 billion and was exposed fairly evenly to large-cap and mid-cap Financials firms, whereas the average market cap for the S&P 500 Financials was more than $33 billion and was nearly all large caps. The bottom line is that when many people think of Financials, they think of large banks first. Those are largely, if not almost completely, avoided in the WisdomTree High Dividend Index. 12 Source: Bloomberg. 2007 screening date refers to 11/30/07. 13 Source: Bloomberg, with data as of 9/30/08. 14 Dividend Stream : References the WisdomTree Dividend Index universe. For each firm, the most current indicated dividend per share for each constituent is multiplied by the number of shares outstanding, and then the sum is taken for all constituent firms
FIGURE 7: THE DIFFERENCE WITHIN THE FINANCIALS SECTOR Index Weight 14% 12% 1 8% 6% 4% 2% 12.22% 3.03% GICS Industry Group Exposures: Financial Sectors 5.24% 1.12% 0.99% WT High Dividend Index S&P 500 Index 2.61% 0.36% 4.75% Real Estate Banks Insurance Diversified Financials Index Weight 12 10 8 6 4 2 41.7% 95.7% Above $10 Billion Market Capitalization Size Breakdown of Financial Sector 46.3% 4.3% Between $2 Billion & $10 Billion WT High Dividend Index S&P 500 Index 12. 0. Below $2 Billion Source: Bloomberg, with data as of 3/31/16. You cannot invest directly in an index. Subject to change. CONCLUSION The WisdomTree High Dividend Fund has had an impressive performance record over its nearly 10-year history. And we believe it provides access to the defensive sectors investors want during late-stage bull and bear markets. It offers investors: + Access to high-dividend stocks + A dividend-weighted portfolio that may provide more income + A history of impressive risk-adjusted returns We can t wait to see what the next 10 years will bring.
WISDOMTREE HIGH DIVIDEND FUND Quick Facts Ticker: DHS Exchange: NYSE Expense Ratio: 0.38% Structure: Open-end ETF Exposure: Domestic, dividend-paying stocks across the market capitalization spectrum with relatively higher dividend yields Rebalancing: The portfolio is rebalanced on an annual basis At WisdomTree, we do things differently. We build our ETFs with proprietary methodologies, smart structures and/or uncommon access to provide investors with the potential for income, performance, diversification and more. For more information or to invest in DHS, contact your WisdomTree representative or call 866.909.WISE (9473). Investors should carefully consider the investment objectives, risks, charges and expenses of the Funds before investing. To obtain a prospectus containing this and other important information, please call 866.909.WISE (9473), or visit wisdomtree. com to view or download a prospectus. Investors should read the prospectus carefully before investing. There are risks associated with investing, including possible loss of principal. Funds focusing their investments on certain sectors may be more vulnerable 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 currently paying dividends may cease paying dividends at any time. 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 very short periods, should not be the sole factor in making your investment decision. The Global Industry Classification Standard ( GICS ) was developed by and is the exclusive property and a service mark of MSCI Inc. ( MSCI ) and Standard & Poor s ( S&P ), a division of The McGraw-Hill Companies, Inc., and is licensed for use by WisdomTree Investments, Inc. Neither MSCI, S&P nor any other party involved in making or compiling the GICS or any GICS classifications makes any express or implied warranties or representations with respect to such standard or classification (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability and fitness for a particular purpose with respect to any such standard or classification. Without limiting any of the foregoing, in no event shall MSCI, S&P, any of their affiliates or any third party involved in making or compiling the GICS or any GICS classifications have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits), even if notified of the possibility of such damages. WisdomTree High Dividend Index: Measures the performance of the 3 highest-yielding dividend-paying equities in the WisdomTree Dividend Index; weighted by indicated cash dividends. S&P 500 Index: A market capitalization-weighted benchmark of 500 stocks selected by the Standard & Poor s Index Committee, designed to represent the performance of the leading industries in the United States economy. S&P 500 Value Index: A market capitalization-weighted benchmark designed to measure the value segment of the S&P 500 Index. S&P 500 Growth Index: A market capitalization-weighted benchmark designed to measure the growth segment of the S&P 500 Index. WisdomTree Dividend Index: Measures the performance of dividend-paying companies incorporated in the United States that pay regular cash dividends and meet WisdomTree s eligibility requirements; weighted by indicated cash dividends. Russell 1000 Value Index: A measure of the large-cap value segment of the U.S. equity universe, selecting from the Russell 1000 Index. WisdomTree Funds are distributed by Foreside Fund Services, LLC, in the U.S. only. WTGM-1347