Adam McCullough: Bronze-rated WisdomTree MidCap Earnings is a passive mid-cap equity strategy that weights its holdings by fundamental metrics. This fund effectively diversifies risk and rebalances into stocks as they become cheaper relative to their earnings, which should give it an edge over the long run.
This fund offers a cost advantage compared to actively managed peers, but there are cheaper market-cap-weighted options available. It tracks the mid-cap portion of the WisdomTree Earnings Index, which weights its holdings by their cumulative earnings over the prior four quarters, relative to the aggregate earnings of the selection universe. WisdomTree measures earnings by S&P Core earnings instead of GAAP earnings, because they believe these more accurately represent a stock's operational earnings. S&P Core earnings remove gains or losses from noncore business activities such as hedging, asset sales, and litigation.
So far, this fund's approach has paid off. Through February 2017, it bested the mid-cap blend category average and S&P MidCap 400 index by 2.9 and 0.5 percentage points annually over the trailing 10 years. Compared to the index, most of this fund's outperformance came from underweighting financial stocks during the financial crisis and adding exposure back post-crisis. The fund largely benefitted from the timing of its rebalance, which investors shouldn't expect to persist in the future. Over the trailing three- to five- year periods through February 2017, this fund still handily topped the category average but lagged the index.
Investors interested in a value-oriented mid-cap strategy should consider WisdomTree MidCap Earnings ETF.