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ETF Specialist

Contrarian Rebalancing Gives This Earnings-Focused ETF an Edge

WisdomTree MidCap Earnings' rebalancing approach should keep its valuation in check.

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 WisdomTree MidCap Earnings ETF (EZM) is one of the few passive mid-cap equity strategies focused on its holdings' earnings. This exchange-traded fund effectively diversifies risk and rebalances into stocks as they become cheaper relative to their earnings, which should give it an edge over its peers in the long run. It offers a cost advantage compared with actively managed peers, but there are cheaper index-tracking peers available. It earns a Morningstar Analyst Rating of Bronze.

The fund offers broad exposure to profitable U.S. mid-cap stocks and weights them by the value of earnings that each stock has generated over the prior year. This approach injects a contrarian rebalancing discipline, causing the fund to increase its exposure to stocks that have become cheaper relative to their earnings to restore its target weightings and trim those that have become more expensive. Not surprisingly, this fund's rebalancing process inserts a value and profitability tilt, but its exposure to low valuation and highly profitable stocks isn't consistent because it doesn't explicitly target them. While stocks with larger absolute earnings tend to have larger market capitalizations, the fund has persistently exhibited a smaller market-cap orientation than most of its peers. Over the trailing 10 years through March 2017, the fund's average market capitalization measured about half of the mid-cap blend Morningstar Category average's.

Adam McCullough has a position in the following securities mentioned above: VOE. Find out about Morningstar’s editorial policies.