MIDSIZED COMPANIES. OUTSIZED POTENTIAL. DISCOVER THE POTENTIAL OF MID-CAPS
EQUITY S MIDDLE CHILD Whether you are one, have one, or know one, chances are you have heard the term middle child syndrome. And whether it is a true phenomenon or not, middle children can often see themselves as ignored and without a clearly defined place in the family. Mid-cap stocks tend to suffer the same condition, with their large-cap older siblings and small-cap younger ones often garnering the bulk of investor attention and portfolios. But mid-caps are smart assets worthy of your time and investment. Consider that mid-caps are simultaneously established and still developing. They tend to have greater liquidity and more capital than small caps, while having better earnings growth potential than large caps. Additionally, mid-caps have significant growth potential and have, as the chart to the right illustrates, outperformed their large and small-cap brethren over the short and long term. Put simply, if you ve been ignoring mid-caps, you ve been missing out on tremendous opportunities. Mid-Caps Can Grow Quickly Business Life Cycle Start-Up Growth Maturity Decline Mid-cap companies are in their prime typically providing more stability than small companies and more growth potential than large ones.
PERFORMANCE THAT HAS LED THE PACK In the equities family, mid-caps may very well be the middle child, but their performance has been anything but middle of the road. In fact, historically, mid-caps may well be the best-performing asset class out there. Not only have they have led the pack outperforming small-and large-cap stocks over both the short and long terms, but they have also performed quite consistently. Mid-Cap Stocks Outperformed 2500 2,367 Cumulative Growth of Hypothetical 1,000 2000 1500 1000 500 S&P 500 Index S&P MidCap 400 Index Russell 2000 Index 2,129 2,049 0 Sep 07 Sep 08 Sep 09 Sep 10 Sep 11 Sep 12 Sep 13 Sep 14 Sep 15 Sep 16 Sep 17 Sources: WisdomTree, Bloomberg. Data is for the 10-year period as of 9/30/17. You cannot invest directly in an index. Past performance is not indicative of future results. Mid-caps have outperformed both small and large caps over the past 10 years. Percentage of Rolling Time Periods Exhibiting Leadership 7/31/1991 to 9/30/17 S&P 500 Index S&P MidCap 400 Index Russell 2000 Index 120% % of Rolling Time Periods Leading 80% 60% 40% 20% 0% 33% 46% 3-Year 22% 25% 67% 5-Year 8% 0% 10-Year 0% 0% 15-Year 0% 0% 20-Year 0% Sources: WisdomTree, Bloomberg. Data is measured as of 9/30/17. You cannot invest directly in an index. Past performance is not indicative of future results. Over the rolling 10-, 15- and 20-year periods, mid-caps have outperformed of the time. They have also outperformed with the highest frequency over the 3- and 5-year periods.
A MID-CAP BY ANY OTHER NAME. THINK YOU RE COVERED? THINK AGAIN. Mid-caps are one of the most exciting, yet least understood, asset classes. In fact, many investors purchase an all-cap fund thinking they re getting mid-cap exposure. But are they really? Chances are that their all-cap fund is not providing the mid-cap exposure they want or need. Consider that the sweet spot for mid-caps is between 2 billion and 10 billion. The S&P 1500 and the MSCI USA IMI, two popular U.S. all-cap indexes, are both heavily weighted to large caps and have only about 10-15% exposure to mid-caps. In fact, both of their average weighted market caps are well above 100 billion (and that s just the average). To gain true mid-cap exposure, you need a true mid-cap fund focused on true mid-cap companies (but they re not all created equal). All-Cap Indexes 90% 80% 82.7% 87.8% MSCI USA IMI S&P 1500 Composite Index Index Weight 70% 60% 50% 40% Weighted Average Market Capitalization (in billions) MSCI USA IMI 135.9 S&P 1500 Composite Index 147.0 30% 20% 10% 0% 13.9% 10.1% 3.4% 2.1% Above 10 billion Between 2 Billion - 10 billion Below 2 billion Market Capitalization Bucket Boundaries Sources: WisdomTree, Bloomberg. Data is as of 9/30/17. You cannot invest directly in an index. Holdings subject to change. These all-cap indexes look a lot more like large-cap indexes. Mid-Cap Indexes Weighted Average Market Capitalization (in billions) 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0 12.09 7.63 5.37 4.39 MSCI USA Mid Cap Index WisdomTree MidCap Dividend Index S&P MidCap 400 Index WisdomTree MidCap Earning Index Sources: WisdomTree, Bloomberg. Data is as of 9/30/17. You cannot invest directly in an index. Not all mid-cap indexes are true mid-cap indexes. MSCI USA Mid Cap Index has a weighted average market-cap of over 12 billion putting it outside the sweet spot for mid-caps.
MID-CAPS NEED RULES Conventional wisdom is that less-efficient markets, such as mid-caps, require active management. At WisdomTree, we respectfully disagree. We believe in the power of rules-based processes especially in inefficient markets. And we believe the results speak for themselves. DIVIDENDS AVERAGE ANNUAL RETURNS Total Return (NAV) AVERAGE ANNUAL RETURN Market Price RANKING VS. MORNINGSTAR MID-CAP VALUE PEER GROUP OF ACTIVE MANAGERS & ETFs As of 9/30/2017 WT Ticker Exp. Ratio WT Date 1-Year 5-Year 10-year 1-Year 5-year 10-year 1-Year 5-year 10-year WisdomTree MidCap Dividend DON 0.38% 6/16/06 12.67% 15.08% 9.16% 9.50% 12.58% 15.07% 9.16% 9.53% 28% 93% 94% 89% S&P MidCap 400 Index 17.52% 14.43% 9.00% 9.80% 17.52% 14.43% 9.00% 9.80% 80% 82% 92% 92% Russell MidCap Value Index 13.37% 14.33% 7.85% 8.71% 13.37% 14.33% 7.85% 8.71% 34% 79% 73% 75% WisdomTree MidCap Dividend Expense Ratio: 0.38%; Date: 6/16/06. NUMBER OF PEERS IN CATEGORY: 1-year: 410, 5-year: 319, 10-year: 226, : 204 EARNINGS AVERAGE ANNUAL RETURNS Total Return (NAV) AVERAGE ANNUAL RETURN Market Price RANKING VS. MORNINGSTAR MID-CAP BLEND PEER GROUP OF ACTIVE MANAGERS & ETFs As of 9/30/2017 WT Ticker Exp. Ratio WT Date 1-Year 5-Year 10-Year 1-Year 5-Year 10-Year 1-Year 5-Year 10-Year WisdomTree MidCap Earnings EZM 0.38% 2/23/07 18.27% 14.95% 10.03% 9.34% 18.10% 14.96% 10.04% 9.34% 80% 93% 99% 98% S&P MidCap 400 Index 17.52% 14.43% 9.00% 8.74% 17.52% 14.43% 9.00% 8.74% 75% 89% 97% 96% WisdomTree MidCap Earnings Expense Ratio: 0.38%; Date: 2/23/07. NUMBER OF PEERS IN CATEGORY: 1-year: 435, 5-year: 323, 10-year: 216, : 199 Over the long term, the WisdomTree MidCap Dividend has outperformed about 90% of its peers and has ranked in the top quintile for its peer group since inception period. Also, the WisdomTree MidCap Earnings has outperformed 98% of its peers on a since-inception basis. Sources: WisdomTree, Morningstar Direct. Performance is historical and does not guarantee future results. Current performance may be lower or higher than quoted. Investment returns and principal value of an investment will fluctuate so that an investor s shares, when redeemed, may be worth more or less than their original cost. Performance data for the most recent month-end is available at www.wisdomtree.com. WisdomTree shares are bought and sold at market price (not NAV) and are not individually redeemed from the. Total returns are calculated using the daily 4:00 p.m. EST net asset value (NAV). Market price returns reflect the midpoint of the bid/ask spread as of the close of trading on the exchange where shares are listed. Market price returns do not represent the returns you would receive if you traded shares at other times. Data is as of the most recent quarter-end, 9/30/17. Past performance is not indicative of future results. 2016 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance, rankings and ratings areno guarantee of future results. The % of Peer Group Beaten is the funds total-return percentile rank compared to all funds within the same Morningstar Category and is subject to change each month.
RULES-BASED METHODOLOGIES Most indexes, and the ETFs that track them, weight stocks by market capitalization (which is share price x number of shares outstanding) a method that assumes price is always the best measure of true value. WisdomTree, however, believes that fundamentals like dividends or earnings are a better measure of a company s value than price alone. The charts below illustrate the difference weighting by fundamentals can make: DIVIDENDS WEIGHTING BY DIVIDENDS Market Capitalization-Weighted Strategy Dividend-Weighted Strategy Market Capitalization Cash Dividends Dividend Yield Weight Investment Dividend Generation Weight Investment Dividend Generation Company A 100 Billion 2 Billion 2.0% 46.30% 46,296 926 20.00% 20,000 400 Company B 50 Billion 3 Billion 6.0% 23.15% 23,149 1,389 30.00% 30,000 1,800 Company C 66 Billion 5 Billion 7.6% 30.56% 30,556 2,315 50.00% 50,000 3,788 Totals 4,630 5,988 Source: WisdomTree. Hypothetical example for illustrative purposes only. Does not reflect an actual investment. EARNINGS WEIGHTING BY EARNINGS Market Capitalization-Weighting Earnings Weighting Market Capitalization Earnings Stream P/E Ratio Weight Investment Weighted P/E Ratio Weight Investment Weighted P/E Ratio Company A 500 Billion 25 Billion 20x 55.56% 55,556 33.33% 33,333 Company B 250 Billion 25 Billion 10x 27.78% 27,778 33.33% 33,333 Company C 150 Billion 25 Billion 6x 16.67% 16,667 33.33% 33,333 Totals 900 Billion 75 Billion 100,000 12.00x 100,000 9.47x Source: WisdomTree. Hypothetical example for illustrative purposes only. Does not reflect an actual investment. 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. Weighting by the Dividend Stream provides 30% more income using the same three stocks and the same initial investment. Weighting by the Earnings Stream can help reduce overall price-to-earnings (P/E) ratios, as it did in this example in essence lowering the price of the market.
MID-CAP EARNINGS OR MID-CAP DIVIDENDS? For those looking for dividend income that has the potential to grow over time, the WisdomTree MidCap Dividend (DON) may be the better option to consider. Especially in a low-yielding environment, people may tilt toward a more defensive approach that generates a great proportion from dividends as opposed to price appreciation. Meanwhile those investors looking for a broad market exposure with a quality bias, the WisdomTree MidCap Earnings (EZM) may be an option to consider. The excludes more speculative and unprofitable companies from its exposure, and only companies that have demonstrated their ability to generate positive earnings are eligible for inclusion. In a rising rate, improving economic condition, this approach may provide greater sensitivity to that growth. MID-CAPS HAVE EARNED A PLACE IN YOUR PORTFOLIO While all mid-cap companies provide significant performance potential, all mid-cap ETFs are not created equal. Weighting by fundamentals like dividends or earnings (and focusing on true mid-cap stocks) can not only help enhance performance potential, but may also maximize income potential or lower the price of the market. WisdomTree pioneered the concept of fundamental weighting and offers the largest families of dividend and earnings ETFs, covering all major asset classes, all over the world. Learn more about mid-caps and fundamental weighting at WisdomTree.com. Index definitions: S&P 500 Index: 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 MidCap 400 Index: Provides investors with a benchmark for mid-sized companies. The Index covers over 7% of the U.S. equity market and seeks to remain an accurate measure of mid-sized companies, reflecting the risk and return characteristics of the broader mid-cap universe on an ongoing basis. Russell 2000 Index: Measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 is a subset of the Russell 3000 Index, representing approximately 10% of the total market capitalization of that Index. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership. CRSP U.S. Total Market Index: A market capitalization-weighted measure of all-cap companies representing nearly of the investable equity market in the United States. S&P 1500 Composite Index: The index is designed to represent the performance of the U.S. equity market, which combines three indexes, the S&P 500, S&P MidCap 400 and S&P SmallCap 600. CRSP U.S. Mid Cap Index: A market capitalization-weighted measure of the performance of mid-cap equities in the United States. WisdomTree MidCap Dividend Index: A fundamentally weighted index that measures the performance of the mid-cap segment of the U.S. dividend-paying market. WisdomTree MidCap Earnings Index: A fundamentally weighted index that measures the mid-cap segment of the 0.5 earnings-generating market.
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