WisdomTree Research MARKET INSIGHTS [ August 2013 ] Assessing the Valuations in Various Emerging Market Strategies BY JEREMY SCHWARTZ, CFA, DIRECTOR OF RESEARCH & CHRISTOPHER GANNATTI, CFA, RESEARCH ANALYST The past 3 years 1 have seen a wide disparity in performance across regional equity markets, specifically the S&P 500 Index (U.S. Equities), the MSCI Emerging Markets Index () and the MSCI EAFE Index (Developed International Equities). Such a wide range of performance has the potential to indicate a valuation 2 opportunity in emerging market equities, like those in the compared to U.S. Equities. True, it may be a difficult psychological maneuver, given that U.S. Equities have performed so well, but history has taught us time and again that discomfort with an investment idea often has the potential to offer the greatest rewards. EVALUATING THE VALUATIONS To explore relative valuations and how today s prices relate to the historical picture, we took two different approaches: 1) Dividend Yield 3 Analysis: This is an analysis encompassing the full available history of the MSCI Emerging Markets Index that we have done and then refreshed in past commentaries. It gives an indication of how our current position relates to a performance history of almost 25 years. If you have been following our research for the last two years, you have seen these charts from us before. 2) Price-to-Earnings (P/E) Ratio 4 Analysis: Here, we look at how the (P/E) ratios of the, as well as its sector and country sub-indexes, compare to 10-year averages from July 31, 2003, to July 31, 2013. In short, when looking at some of the broad emerging market indexes or even indexes that focus on valuation criteria for the emerging markets, you ll find them to be among the least expensive parts of the global equity markets today. But not all indexes, sectors or countries share those same low valuations, so we will explore the areas where the valuation opportunity may receive the highest emphasis. 1 Specifically 7/31/2010 to 7/31/2013. 2 Valuation: Refers to metrics that relate financial statistics for equities to their price levels to determine if certain attributes, such as earnings or dividends, are cheap or expensive. 3 Specifically, trailing 12-month 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. 4 Price-to-earnings (P/E) ratio: Share price divided by earnings per share. Lower numbers indicate an ability to access greater amounts of earnings per dollar invested. WWW.WISDOMTREE.COM 866.909.WISE (9473)
DIVIDEND YIELD ANALYSIS We believe that the s dividend yield is an important indicator of its valuation. In fact, as of July 31, 2013, more than 95% of the s weight was in companies that had paid at least one dividend over the preceding 12 months 5, indicating a strong dividend-paying culture in the region. STRUCTURE OF THE ANALYSIS With respect to comparisons to its own historical levels, our research shows that the s starting trailing 12-month dividend yield at the beginning of a calendar year had a strong relationship to the subsequent performance over the next 12-month period. The has 24 full calendar years of index data for which year-end trailing 12-month dividend yields can be calculated. We divided these years into two baskets sorted by the trailing 12-month dividend yield as of December 31 of each year: + High Dividend Yield Years : Years in which the starting trailing 12-month dividend yield was above the median 6 trailing 12-month dividend yield for the. The median trailing 12-month dividend yield was 2.25%. + Low Dividend Yield Years : Years in which the starting trailing 12-month dividend yield was below the median trailing 12-month dividend yield for the. PERFORMANCE: WHERE THE RUBBER MEETS THE ROAD We think figure 1 paints a clear picture of the differences in returns between periods classified as High Dividend Yield Years and those classified as Low Dividend Yield Years. FIGURE 1: PERFORMANCE SUMMARY OF THE FOR CALENDAR YEARS FOLLOWING HIGH AND LOW TRAILING 12-MONTH DIVIDEND YIELDS [ 12/31/1988 12/31/2012 ] 35% 33.0% Avg. 1-Year Forward Performance 30% 25% 20% 15% 10% 5% 0% 17.5% High Dividend Yield Years Average of All Years Low Dividend Yield Years 1.9% Sources: WisdomTree, MSCI. Past performance is not indicative of future results. 5 Source: Bloomberg. 6 Median: The value within a dataset at which 50% of all observations occur above and 50% occur below. 2 WWW.WISDOMTREE.COM 866.909.WISE (9473)
+ Squarely in the High Dividend Yield Year Range: As of July 31, 2013, the exhibited a trailing 12-month dividend yield of 2.93% 7. There were five calendar years that started with a higher value, and each was associated with a positive subsequent return. While this past performance cannot guarantee any particular future return, we do believe that 2.93% is a strong potential valuation indicator relative to the performance history of the. + Big Dispersion from High to Low: We ve pointed to this analysis in a few commentaries, because we believe that the three bars in figure 1 make the statement that valuation is of paramount importance for the. On average, returns of the High Dividend Yield Years eclipsed those of the Low Dividend Yield Years by over 30%. While the dividend yield analysis is a strong and important valuation indicator for the broader market, we also want to look at other factors and take the analysis a step beyond broad market indexes to the various components such as sectors and countries. For this, we look at historical P/E ratios, another common valuation framework. P/E RATIO ANALYSIS P/E ratios comprise two components: price and earnings per-share. It is important to keep this in mind, because at times a P/E ratio might appear low due to a falling price, while at other times it could appear low because of quickly increasing earnings per share. In figures 2a and 2b we include the three-year cumulative return for each respective sector and the top 15 countries by weight as of July 31, 2013, within the, as they provide context for what has been occurring with respect to the price component of the P/E ratio and whether a rising P/E ratio is driven by rising prices or falling earnings. We also include the beta 8 statistic relative to the. We want to show a connection between the volatility 9 of the sectors and their relative prices today. FIGURE 2A: SECTOR-BASED P/E RATIO ANALYSIS [ 7/31/2003 7/31/2013 ] WITH THREE-YEAR CUMULATIVE PERFORMANCE AS OF 7/31/2013 FOR ERGING MARKETS SECTOR INDEXES Current P/E Ratio 10-Year Average P/E Ratio % Difference 3-Year Cumulative Return MSCI Emerging Markets Index 11.3x 13.4x -15.6% 4.1% 1.00 Energy 6.9x 9.1x -24.5% -12.7% 1.23 Financials 9.2x 13.5x -31.7% -1.6% 1.02 Telecommunication Services 10.3x 13.9x -25.7% 17.2% 0.75 Information Technology 11.5x 21.6x -46.7% 24.6% 1.00 Consumer Discretionary 12.9x 14.1x -8.4% 28.1% 1.00 Industrials 17.0x 15.9x 7.0% -3.5% 1.04 Utilities 18.6x 16.5x 13.0% -5.9% 0.79 Materials 18.7x 13.6x 37.8% -24.9% 1.26 Consumer Staples 24.4x 19.4x 26.2% 49.8% 0.75 Health Care 27.8x 26.1x 6.5% 25.2% 0.73 Sources: Standard & Poor s, WisdomTree. Subject to change. Past performance is not indicative of future results. You cannot invest directly in an index. 7 Source: MSCI. 8 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. 9 Volatility: Synonymous with standard deviation, which is a measure of how widely an investment or investment strategy s returns move around an average value over a specific 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. Beta 3 WWW.WISDOMTREE.COM 866.909.WISE (9473)
FIGURE 2B: COUNTRY-BASED P/E RATIO ANALYSIS [ 7/31/2003 7/31/2013 ] WITH THREE-YEAR CUMULATIVE PERFORMANCE AS OF 7/31/2013 FOR ERGING MARKET COUNTRY INDEXES Current P/E Ratio 10-Year Average P/E Ratio % Difference 3-Year Cumulative Return MSCI Emerging Markets Index 11.3x 13.4x -15.6% 4.1% 1.00 Russia 4.6x 8.7x -47.1% 0.6% 1.31 Turkey 9.1x 10.9x -16.2% -2.4% 0.97 China 9.5x 14.4x -33.5% -0.2% 1.04 Poland 11.5x 14.5x -20.5% 8.5% 1.08 Brazil 13.7x 12.2x 12.3% -29.4% 1.19 Thailand 13.8x 12.5x 10.5% 70.3% 0.83 South Korea 14.7x 13.2x 11.2% 19.1% 1.15 India 15.6x 18.0x -13.5% -17.1% 0.99 South Africa 15.8x 14.3x 10.6% 11.1% 1.02 Malaysia 16.1x 16.0x 0.8% 39.2% 0.67 Indonesia 16.9x 14.3x 18.5% 22.2% 0.75 Colombia 18.8x 18.8x 0.4% 22.6% 0.70 Chile 20.0x 21.7x -7.7% -11.9% 0.78 Taiwan 20.8x 21.6x -3.9% 23.8% 0.86 Mexico 21.2x 16.4x 29.3% 33.8% 0.99 Source: Bloomberg. Beta + Potential Depressed P/E Ratio Sectors & Countries: We ll define these as sectors and countries with P/E ratios (as of July 31, 2013) below their averages over the prior 10-year period. That would include Consumer Discretionary, Energy, Financials, Information Technology and Telecommunication Services. Of those only Energy and Financials had negative performance over the prior three years. These are also the two sectors with single-digit P/E ratios. On the country side, Russia, Turkey, China, Poland, India, Chile and Taiwan have below-average P/E ratios. Of those, Russia and China clearly exhibited the deepest discount. It s also of interest that Russia (the least expensive country equity market) and Energy (the least expensive sector equity market) have betas substantially above 1.00. + Materials & Brazil: The sector with the worst cumulative performance over the prior three years was Materials, down almost 25%. However, the sector s P/E ratio as of July 31, 2013, is almost 40% above its 10-year average. How can this be? This is a good example of a sector that has seen earnings depressed during this latest cycle, which can push up the overall P/E ratio even in the face of falling prices. Brazil offers another, similar example, in that its P/E ratio is currently about 12% above its 10-year average and yet it has the worst three-year cumulative performance of all the country indexes we show. + Consumer Staples: This sector had the best cumulative performance over the prior three years, up nearly 50%. On an absolute basis, its P/E ratio put it among the more expensive sectors within the, and more than 25% above its 10- year average level. Also, it had the highest aggregate level more than 2x that of the the broader. It is worth noting that the sector s beta is 0.75, indicating significantly lower volatility than the as a whole. 4 WWW.WISDOMTREE.COM 866.909.WISE (9473)
+ Russia and China: Russia and China stand out with the steepest discounts to their 10-year average P/E ratios. Both of these equity markets exhibit a beta above 1.00 relative to the MSCI Emerging Markets Index, with Russia s even greater than 1.30. EVALUATING EXPOSURE DIFFERENCES BETWEEN INDEXES Having discussed some of the valuations across countries and sectors, we extend the analysis to look at the composition of the various indexes (as of July 31, 2013) that provide exposure to a broader set of emerging market companies. Of course the underlying exposures to countries and sectors will impact the resulting valuation of these diverse groups, so it is helpful to have that background covered already in figures 2a and 2b. With the following analysis, our ultimate goal is to provide somewhat of a roadmap across different emerging market equity indexes. We therefore select some of the most widely followed, covering a variety of important themes. Below, we outline these themes and the indexes which encapsulate each. At the end of the day, the important thing is to understand the differences the result from each following its specific theme, as each index covers certain attributes at the expense of others. For further analysis we have grouped the indexes into the following segments: Yield-Based or Value Selection: Each of these indexes selects its constituents with some sensitivity to the underlying dividend yield, an important measure of the valuation of the individual companies: + WisdomTree Emerging Markets Equity Income Index (WTEMHY) + S&P Emerging Markets Dividend Opportunities Index ( Dvd Opps) + Dow Jones Emerging Markets Select Dividend Index ( Select Dvd) Value-: Each of these indexes selects its constituents with some sensitivity to the underlying valuation fundamentals and includes measures other than dividend yield: + MSCI Emerging Markets Value Index ( Value) Growth Potential: Each of these indexes selects its constituents with some sensitivity to the underlying growth potential of the individual companies: + WisdomTree Emerging Markets Dividend Growth Index (WTEMDG) + MSCI Emerging Markets Growth Index ( Growth) Volatility-: Each of these indexes selects its constituents with some sensitivity to the volatility of the underlying constituents, with an aim to impact the observed volatility of the index over time: + MSCI Emerging Markets Minimum Volatility Index ( Min Vol) + S&P BMI Emerging Markets Low Volatility Index ( Low Vol) 5 WWW.WISDOMTREE.COM 866.909.WISE (9473)
Sector-: Each of these indexes selects its constituents with a focus on particular sectors, to the potential exclusion of any other attributes: + Dow Jones Emerging Markets Consumer Titans 30 Index ( Cons. Titans) Market Cap: Every analysis needs a broad benchmark upon which to base the calculation of certain statistics, such as beta. It is also a good baseline for looking at different country and sector exposures against a point of reference. For ours, we will use: + MSCI Emerging Markets Index () Dividend- : Each of these indexes selects small-cap stocks solely from a universe of dividend payers in emerging markets 10 : + WisdomTree Emerging Markets SmallCap Dividend Index (WTEMSC) : Each of these indexes selects a broad, inclusive set of small-cap equities from the emerging markets: + MSCI Emerging Markets Index ( Small) So, the first relevant question regards defining the beta for each of these indexes relative to the. Which indexes exhibit the highest or lowest beta? FIGURE 3A: BETA STATISTICS OF EMERGING MARKET EQUITY INDEXES [ as of 7/31/2013 ] WTEMHY Yield-Based Selection Dvd Opps Select Dvd Value- Value Growth Potential WTEMDG Growth Volatility- Min Vol Low Vol Sector- Cons. Titans Market Cap Dividend- WTEMSC Beta 1.03 0.99 0.90 1.05 0.92 0.95 0.77 0.81 0.84 1.00 0.89 0.92 Source: Bloomberg. Small + WTEMHY & Value: WTEMHY and Value have the highest betas of the indexes shown, 1.03 and 1.05, respectively, as of July 31, 2013. + Volatility-: Min Vol and Low Vol, at first initial glance, look to accomplish their objectives, with the lowest beta statistics of all the indexes shown. The betas of the indexes are compilations of their underlying components, and the indexes with lower betas tend to have exposure to the sectors with the lowest betas. 10 WisdomTree s universe of emerging market dividend-paying companies would be the WisdomTree Emerging Markets Dividend Index. 6 WWW.WISDOMTREE.COM 866.909.WISE (9473)
FIGURE 3B & 3C: UNDERLYING COUNTRY AND SECTOR EXPOSURES OF EMERGING MARKET EQUITY INDEXES [ as of 7/31/2013 ] Country WTEMHY Yield-Based Selection Dvd Opps Select Dvd Value- Value Growth Potential WTEMDG Growth Volatility- Min Vol Low Vol Sector- Cons. Titans Market Cap Dividend- WTEMSC Russia 18.7% 3.5% 1.3% 5.4% 10.5% 6.1% 0.7% 0.7% 6.0% 5.7% 0.3% 0.7% China 16.9% 13.1% 8.5% 19.0% 7.4% 18.8% 14.6% 7.0% 6.6% 18.9% 5.8% 17.8% Taiwan 13.6% 13.6% 29.2% 12.0% 6.2% 11.7% 17.7% 23.3% 0.0% 11.8% 25.8% 20.3% Brazil 12.2% 22.1% 14.0% 10.7% 14.7% 11.6% 6.9% 5.4% 17.1% 11.1% 8.5% 6.5% South Africa 9.2% 10.2% 7.9% 7.3% 14.1% 7.4% 8.4% 12.9% 19.7% 7.4% 9.3% 7.9% Thailand 6.1% 5.3% 6.9% 2.5% 11.5% 2.7% 5.9% 3.4% 2.0% 2.6% 9.0% 4.1% Poland 5.4% 9.5% 2.8% 1.4% 0.0% 1.9% 0.4% 1.4% 0.0% 1.6% 3.4% 1.5% Malaysia 4.7% 3.1% 7.0% 4.0% 2.7% 3.9% 9.0% 17.2% 6.4% 4.0% 9.7% 5.4% Turkey 3.3% 9.2% 8.0% 1.9% 2.7% 1.8% 0.0% 2.7% 0.0% 1.8% 5.2% 2.5% Indonesia 2.2% 1.5% 2.8% 2.9% 13.0% 3.1% 7.4% 0.4% 4.0% 3.0% 3.9% 4.9% South Korea 2.2% 2.3% 3.2% 16.2% 0.9% 14.0% 9.7% 7.0% 0.0% 15.1% 9.5% 17.2% India 0.0% 0.2% 0.4% 6.4% 3.4% 6.3% 2.0% 0.4% 10.3% 6.3% 0.9% 5.1% Colombia 0.0% 1.6% 0.0% 0.8% 0.0% 1.2% 3.6% 2.9% 1.6% 1.2% 0.0% 0.0% Chile 2.0% 1.9% 2.3% 1.9% 0.6% 1.7% 5.2% 7.7% 7.2% 1.7% 4.6% 1.8% Mexico 0.0% 0.0% 0.0% 5.6% 10.1% 5.7% 2.2% 3.9% 19.2% 5.6% 1.1% 2.2% Small Sector Consumer Discretionary Consumer Staples WTEMHY Yield-Based Selection Dvd Opps Select Dvd Value- Value Growth Potential WTEMDG Growth Volatility- Min Vol Low Vol Sector- Cons. Titans Market Cap Dividend- WTEMSC Small 3.2% 7.0% 10.6% 7.2% 8.1% 10.3% 3.6% 6.1% 38.6% 8.6% 14.9% 17.7% 2.1% 0.5% 3.4% 2.8% 20.1% 15.0% 14.0% 12.8% 61.4% 9.1% 7.1% 7.5% Energy 20.7% 5.4% 4.9% 16.6% 8.0% 6.5% 6.7% 8.5% 0.0% 11.6% 2.4% 2.6% Financials 25.5% 25.1% 19.1% 30.9% 13.5% 23.8% 27.4% 33.7% 0.0% 27.4% 22.4% 18.7% Health Care 0.1% 0.0% 0.0% 0.2% 1.8% 2.7% 6.6% 2.4% 0.0% 1.4% 2.3% 5.3% Industrials 3.0% 5.4% 7.6% 7.4% 5.6% 5.6% 6.1% 10.8% 0.0% 6.5% 16.2% 15.5% Information Technology 5.1% 8.0% 8.9% 7.1% 8.6% 22.2% 9.9% 1.8% 0.0% 14.5% 13.4% 16.4% Materials 16.4% 16.3% 16.8% 13.9% 13.4% 4.9% 4.7% 8.8% 0.0% 9.4% 12.8% 11.1% Telecommunication Services 17.2% 13.1% 15.4% 9.7% 18.8% 6.4% 13.0% 9.8% 0.0% 8.0% 1.9% 1.5% Utilities 6.8% 19.1% 13.4% 4.4% 2.0% 2.7% 8.0% 5.4% 0.0% 3.4% 6.6% 3.8% Source: Bloomberg. Holdings subject to change. 7 WWW.WISDOMTREE.COM 866.909.WISE (9473)
+ WTEMHY s Higher Beta: Figures 3b and 3c make it much clearer how WTEMHY s 1.03 beta relative to the MSCI Emerging Markets Index could happen. On the sector side, Energy and Materials are both substantial weights. In fact, no index shown in this analysis has more exposure to Energy. On the country side, no other index shown has a higher exposure to Russia another contributing factor to WTEMHY s 1.03 beta. It is worth noting that Value also has similarly high weights to Energy and Materials, but not as much exposure to Russia. + WTEMDG s Lower Beta: It is interesting to note that WTEMDG also takes a dividend-focused approach to emerging market equities but that its beta is substantially lower than that of WTEMHY as of July 31, 2013. From the exposures, it s clear that, on the sector side, Materials and Energy exposures are dialed down and Consumer Staples exposure is dialed up. On the country side, Russia is dialed back a bit while Indonesia is dialed up. TYING IT ALL TOGETHER Thus far, we ve noted certain valuation metrics for emerging market equities, and we have looked at beta as a measure of risk potential. The real value comes from bringing both parts of the analysis together in order to truly judge the type of exposure that each index would appear to be generating to emerging market equities. FIGURE 4: VALUATION MATRIX OF EMERGING MARKET EQUITY INDEXES [ as of 7/31/2013 ] Yield-Based Selection Value- Growth Potential Volatility- Sector- Market Cap Dividend- WTEMHY Dvd Opps Select Dvd Value WTEMDG Growth Min Vol Low Vol Cons. Titans WTEMSC Small Median Price-to- Earnings (P/E) Ratio 1 10.7x 10.2x 12.5x 10.8x 15.3x 15.1x 13.9x 13.9x 20.3x 12.3x 11.5x 11.3x Beta Relative to 2 1.03 0.99 0.90 1.05 0.92 0.95 0.77 0.81 0.84 1.00 0.89 0.92 Long-Term Earnings Growth Expectations 3 8.2% 5.9% 5.4% 10.2% 14.1% 16.0% 12.3% 10.4% 19.2% 13.3% 11.2% 21.5% Median Dividend Yield 4 5.1% 5.7% 4.5% 3.1% 2.1% 1.8% 2.7% 2.8% 1.5% 2.4% 3.0% 2.6% Median Earnings Yield 5 9.3% 9.8% 8.0% 9.3% 6.5% 6.6% 7.2% 7.2% 4.9% 8.1% 8.7% 8.8% Median Dividend Yield / Median 54.6% 58.1% 56.3% 33.3% 32.1% 27.1% 37.5% 38.9% 30.5% 29.5% 34.9% 29.4% Earnings Yield 6 1 Median Price-to-Earnings (P/E) Ratio: Value where 50% of P/E ratios are above and 50% of P/E ratios are below for the specified portfolio. 2 Beta relative to : Beta of the specified index, based on its 7/31/2013 constituents, relative to the MSCI Emerging Markets Index. 3 Long-Term Earnings Growth Expectations: Compilation of analyst estimates of the growth in operating earnings expected to occur over the company s next full business cycle, typically 3-5 years. 4 Median Dividend Yield: Value of the trailing 12-month dividend yield for a given index for which 50% of values are above and 50% of values are below. 5 Median Earnings Yield: Earnings per share divided by price per share, the value of this ratio for which 50% of values are above and 50% of values are below for a given index. 6 Median Dividend Yield/Median Earnings Yield: Meant to calculate the median payout ratio, which is the median dividend per share divided by the median earnings per share. Source: Bloomberg. 8 WWW.WISDOMTREE.COM 866.909.WISE (9473)
+ WTEMHY as the Valuation Hunter : Figure 2A showed that the Energy sector was selling at a large discount to its 10- year average P/E ratio. In figure 2B, we saw that Russia s P/E valuation was similarly depressed. Figures 3b and 3c show these as two of WTEMHY s most significant exposures, and their higher betas relative to the pulled up the beta of WTEMHY accordingly. For those who might be looking at current valuations opportunistically, a beta of greater than 1.0 indicates strong potential to capture a market rally. + Volatility- and Valuation Insensitive: Min Vol and Low Vol show the lowest beta of the indexes shown if reducing beta is the goal, they accomplish that well. However, these volatility-focused indexes have median P/E ratios that are greater than that of the illustrating that some of the lowest-volatility stocks are selling at more expensive P/E ratios. This is consistent with Consumer Staples and Health Care being among the lowest-beta sectors but the highest-p/e-ratio sectors. + WTEMDG with Strong Long-Term Earnings Growth Expectations: WTEMDG had the long-term earnings growth expectations above those of the. However, as mapping out the sector and country exposures has shown, this dials back exposure to some of the lowest-priced market segments (such as Russia and Energy) and increases exposure to higher-priced segments (such Consumer Staples). 9 WWW.WISDOMTREE.COM 866.909.WISE (9473)
CONCLUSION With the proliferation of emerging market equity indexes in the past few years, we believe that it is more important than ever for market participants to refine the view they would like to take on the space. Are they focused predominantly on valuation? Growth potential? A particular sector? The one index fits all approach will no longer cut it. As we ve shown, different emerging market equity indexes accomplish different goals in this equity market area. Unless otherwise stated, data source is WisdomTree. Dividends are not guaranteed and a company s future abilities to pay dividends may be limited. A company currently paying dividends may cease paying dividends at any time. 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, call 866.909.WISE (9473) or visit wisdomtree.com. Read the prospectus carefully before you invest. 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. Investments focusing on a single sector 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 and intervention or political developments. You cannot invest directly in an index. WisdomTree Emerging Markets Dividend Index: A cash dividend-weighted index measuring the performance of dividend-paying equities incorporated in emerging markets. WisdomTree Emerging Markets Equity Income Index: A subset of the WisdomTree Emerging Markets Dividend Index, measuring the performance of the top 30% of stocks with the highest trailing 12-month dividend yields, weighted by cash dividends. WisdomTree Emerging Markets SmallCap Dividend Index: A subset of the WisdomTree Emerging Markets Dividend Index, measuring the performance of the smallest firms by market capitalization comprising 10% of the total market capitalization, weighted by cash dividends. WisdomTree Emerging Markets Dividend Growth Index: A fundamentally weighted index designed to track the performance of dividend-paying emerging market companies that WisdomTree believes have the potential to increase their dividends due to certain factors, which include estimated earnings growth, return on equity and return on assets. Weighting is by trailing 12-month cash dividends. S&P 500 Index: A market capitalization-weighted benchmark of 500 stocks selected by the Standard and Poor s Index Committee, designed to represent the performance of the leading industries in the United States economy. MSCI EAFE Index: A market cap-weighted index composed of companies representative of the developed market structure of 22 developed countries in Europe, Australasia and Japan. MSCI Emerging Markets Minimum Volatility Index: An index with constituents selected from the MSCI Emerging Markets Index, with a focus on an optimization process subject to constraints, that attempts to generate lower volatility than the MSCI Emerging Markets Index. MSCI Emerging Markets Index: A broad market capweighted index showing performance of equities across 21 emerging market countries defined as emerging markets by MSCI. MSCI Emerging Markets Value Index: A market capitalization-weighted subset of stocks in the MSCI Emerging Markets Index that have lower share prices relative to their earnings or dividends per share. MSCI Emerging Markets Growth Index: A market capitalization-weighted subset of stocks in the MSCI Emerging Markets Index that have higher share prices relative to their earnings or dividends per share. MSCI Emerging Markets Index: A free float-adjusted market capitalization-weighted index designed to measure the performance of emerging market equities, specifically focusing on the small-cap segment of these equity markets. Dow Jones Emerging Markets Select Dividend Index: Stocks are selected to the index based on indicated annual dividend yield, subject to eligibility screens for 12-month earnings-per share, indicated annual dividend yield, dividend history, float-adjusted market capitalization and three-month daily average trading volume. Weighting is by indicated annual yield. S&P Emerging Markets Dividend Opportunities Index: An index of emerging market equity performance designed to provide exposure to high-yielding common stocks from the emerging markets, while meeting diversification, stability and tradability requirements. S&P Emerging Markets Low Volatility Index: Index designed to measure the performance of the least volatile stocks in the S&P Emerging Plus LargeMidCap Index and S&P Global BMI sub-index. Dow Jones Emerging Markets Consumer Titans Index: Index designed to measure the performance of the 30 leading emerging market companies in the consumer goods and consumer services industries. Weighting is by floatadjusted market capitalization, subject to diversification requirements. MSCI Emerging Markets Consumer Discretionary, Consumer Staples, Energy, Financials, Health Care, Industrials, Information Technology, Materials, Telecommunication Services and Utilities indexes. Together these market capitalization-weighted indexes comprise the total MSCI Emerging Markets Index. MSCI Russia Index: A free float-adjusted market capitalization-weighted equity index designed to measure the performance of the Russian equity market. MSCI Turkey Index: A free float-adjusted market capitalization-weighted equity index designed to measure the performance of Turkey s equity market. MSCI China Index: A free float-adjusted market capitalization-weighted equity index designed to measure the performance of the Chinese equity market. MSCI Poland Index: A free float-adjusted market capitalization-weighted equity index designed to measure the performance of Poland s equity market. MSCI Brazil Index: A free float-adjusted market capitalization-weighted equity index designed to measure the performance of the Brazilian equity market. MSCI Thailand Index: A free floatadjusted market capitalization-weighted equity index designed to measure the performance of Thailand s equity market. MSCI South Korea Index: A free float-adjusted market capitalization-weighted equity index designed to measure the performance of the South Korean equity market. MSCI India Index: A market capitalization-weighted index designed to measure the performance of the Indian equity market. MSCI South Africa Index: A free float-adjusted market capitalization-weighted equity index designed to measure the performance of South Africa s equity market. MSCI Malaysia Index: A free float-adjusted market capitalization-weighted equity index designed to measure the performance of Malaysia s equity market. MSCI Indonesia Index: A free float-adjusted market capitalization-weighted equity index designed to measure the performance of Indonesia s equity market. MSCI Colombia Index: A free float-adjusted market capitalization-weighted equity index designed to measure the performance of Colombia s equity market. MSCI Chile Index: A free float-adjusted market capitalization-weighted equity index designed to measure the performance of Chile s equity market. MSCI Taiwan Index: A free float-adjusted market capitalization-weighted equity index designed to measure the performance of Taiwan s equity market. MSCI Mexico Index: A free float-adjusted market capitalization-weighted equity index designed to measure the performance of Mexico s equity market. WisdomTree Funds are distributed by ALPS Distributors, Inc. Jeremy Schwartz and Christopher Gannatti are registered representatives of ALPS Distributors, Inc. 2013 WisdomTree Investments, Inc. WisdomTree is a registered mark of WisdomTree Investments, Inc. WIS005622 8/2014 10 WWW.WISDOMTREE.COM 866.909.WISE (9473)