The vast majority of
ETFs
currently on the market utilize market capitalization levels for
their weighting schemes. This means that the biggest firms, in
terms of stock price multiplied by shares outstanding, carry the
biggest weight in most ETFs.
While this is by far the most popular way to assign weights,
it is by no means the only way out there. In terms of alternative
weighting systems there are plenty including revenue, dividend,
and an often overlooked one in earnings weighted (see
Alternative ETF Weighting Methodologies 101
).
This system gives the biggest weights to the firms that have
earned the most in the given year, focusing in on value
companies, but also large caps from a different angle. When
compared to traditional market cap focused funds, this could
result in a lower volatility play that may not experience as big
of booms and busts as its market cap focused peers.
Why Earnings?
This approach could be the way to go as while a number of
factors come in to play for stock performance, arguably the most
important over long time periods is earnings. These profits fuel
expectations and models, company prospects, and are generally
speaking, the lifeblood of any business and weighting towards
this key metric only makes sense.
It could also help to reduce risk and mitigate uncertain
companies in the investment picture that have not found a way to
turn a profit and may never be able to do so. This strategy could
also reduce volatility, although it seems likely to leave
investors more concentrated than in a broad benchmark technique
which will also include firms that aren't earning anything at all
(also see
What is an Equal Weight ETF?
).
For investors seeking to do this in ETF form, there is
actually a small lineup of U.S. focused ETFs that accomplishes
this task. Below, we profile in greater detail these ETFs for
investors who are seeking to zero in on firms that are making
money in order to reduce volatility in this uncertain market
environment, while focusing on one of the most important aspects
of stock investing at the same time:
WisdomTree MidCap Earnings ETF (
EZM
)
This ETF tracks a mid cap earnings index, charging investors
38 basis points a year in fees. The product holds over 600 stocks
in its basket, putting about 19% in consumer cyclical, 17% in
industrials, and 16% in technology.
The top three stocks account for roughly 4% of assets, while
the top ten is less than 10% of assets, suggesting that the
product is quite spread out. This is also true from a style
perspective, although there is definitely a tilt towards value as
growth accounts for just 22% of assets (see
Mid Cap ETF Investing 101
).
A comparable market cap weighted mid cap ETF,
MDY
, charges investors just 25 basis points in comparison and holds
about 400 stocks in its basket. Top holdings are different, while
the biggest three sectors are industrials, technology, and
consumer cyclicals suggesting a similar but slightly different
breakdown.
WisdomTree SmallCap Earnings ETF (
EES
)
This fund gives exposure to a small cap benchmark, charging
investors 38 basis points for its services. It holds nearly 1,000
securities in total with financials, tech, and consumer
discretionary taking the top three spots.
Micro cap securities do account for much of the fund, while
once again value is the biggest single style. In this particular
case, value is over 55% of the product, leaving just 24% for
growth and the rest to blend stocks (read
Three Impressive Small Cap Dividend ETFs
).
A comparable small cap fund is
IWM
, a popular product that beats out EES in terms of expenses and
total number of holdings, but uses a market cap approach. Growth
stocks make up about 33% in this product, while tech,
industrials, and consumer discretionary are the three biggest
sectors.
WisdomTree Total Earnings ETF (
EXT
)
For a broader look at earnings generating stocks across market
cap levels, investors have EXT, a fund that charges 28 basis
points a year in fees. The product holds over 1,350 stocks in
total, putting a focus on tech, financials, and energy.
While it may be spread out across cap sizes, it is still
focused on large caps as these account for nearly 80% of the
total. Value securities make up nearly 46% of assets, leaving
just 29% for growth stocks in this ETF (read
Comprehensive guide to Total Market ETFs
).
A popular competitor in the market cap space is
VTI
from Vanguard, an ETF that charges just six basis points a year
in fees and holds about 1,350 securities. It is slightly less
concentrated in large caps and also has a bit more in growth
stocks than its WisdomTree counterpart
WisdomTree Earnings 500 ETF (
EPS
)
This ETF is appropriate for those seeking an earnings weighted
approach to the S&P 500, as it holds about 500 large cap
stocks while charging 28 basis points a year in fees. Top sectors
include tech, financials, and energy, with the top stocks
including XOM, AAPL, and CVX.
Value stocks account for about 46% of assets with growth
accounting for 30% of EPS. Meanwhile, from a cap look, large caps
make up about 90% of assets while mid caps account for the rest
of this concentrated fund.
A good comparison for this ETF from a cap perspective is
SPY
, the world's most popular ETF. This fund also has about 500
securities, a focus on AAPL and XOM, slightly less of a holding
in mid caps and value securities.
|
|
Performance Comparison Two Years
|
|
|
|
Market Cap
|
Earnings
|
|
Small Cap
|
IWM
|
7.70%
|
EES
|
8.90%
|
|
Mid Cap
|
MDY
|
13.00%
|
EZM
|
16.00%
|
|
Large Cap
|
SPY
|
15.30%
|
EPS
|
15.60%
|
|
Broad Market
|
VTI
|
14.66%
|
EXT
|
15.24%
|
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WISDMTR-SC ERN (EES): ETF Research Reports
WISDMTR-ERN 500 (EPS): ETF Research Reports
WISDMTR-TOT ERN (EXT): ETF Research Reports
WISDMTR-MC ERN (EZM): ETF Research Reports
ISHARES TR-2000 (IWM): ETF Research Reports
SPDR-SP MC 400 (MDY): ETF Research Reports
SPDR-SP 500 TR (SPY): ETF Research Reports
VIPERS-TOT STK (VTI): ETF Research Reports
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