TradingStockAlerts

While we’re on the topic of earnings season (see my last post at the Trade-Radar.com blog), I wanted to share with readers an ETF that fits right in with the earnings theme.

The ETF is the Wisdom Tree Total Earnings Fund (EXT). I hadn’t really heard of this ETF before but I recently started seeing it on the E*Trade Commission-Free ETF Scorecard as one of the top performers.

This ETF is small (total assets around $43M) and thinly traded (1000′s of shares traded per day, not millions) but offers an interesting way to play earnings season. The ETF is attempts to track a proprietary index created by Wisdom Tree itself called the Wisdom Tree Earnings Index. Here is how they describe it:

The WisdomTree Earnings Index is a fundamentally weighted index that measures the performance of earnings-generating companies within the broad U.S. Stock Market. Companies in the index are incorporated and listed in the U.S and have generated positive cumulative earnings over their most recent four fiscal quarters prior to the index measurement date. The index is earnings-weighted in December to reflect the proportionate share of the aggregate earnings each component company has generated. Companies with greater earnings generally have larger weights in the index. WisdomTree Investments uses “Core Earnings”, computed by Standard & Poors, as the weighting metric. Core Earnings is a standardized calculation of earnings developed by Standard & Poors designed to include expenses, incomes and activities that reflect the actual profitability of an enterprises ongoing operations.

In other words, this is not a market-weighted index; it’s a fundamental-based index.

The top ten components of the index and their relative weights are as follows:

1. Exxon Mobil Corp 4.00%
2. Apple Inc 3.53%
3. Microsoft Corp 2.54%
4. Chevron Corp 2.47%
5. JPMorgan Chase & Co 2.35%
6. Wells Fargo & Co 1.65%
7. Wal-Mart Stores Inc 1.44%
8. International Business Machines Corp 1.43%
9. Intel Corp 1.33%
10. Citigroup Inc 1.32%

If you’re getting the impression this index is slanted toward large cap stocks you would be correct. The MarketCap Breakdown is as follows:

Large Cap (> $10 Billion) 79.05%
Mid Cap (= $2 Billion and = $10 Billion) 15.68%
Small Cap (< $2 Billion) 5.27%

Despite the preponderance of large caps, there is still enough of a mixture of market styles that Wisdom Tree considers the benchmark to be the Russell 3000.

Of note is the fact that EXT managed to eke out a gain since its Feb 2007 inception while the Russell 3000 showed a small loss. That is what one would hope to see – that the focus on “strong” companies from an earnings perspective would allow the index to suffer less severe declines when the market as a whole fell. That can be seen in better detail in the following chart where EXT showed out-performance in comparison to IWV, the iShares Russell 3000 ETF.

It is interesting to see that EXT began to more noticeably outperform IWV after the October 2011 bottom. As the rally developed and confidence in company earnings apparently increased, EXT outperformed at short-term peaks and had milder declines during the short-term down-turns.

A few further notes on this ETF:

• Expense ratio is 0.28% which is rather high considering the expense ratio for SPY is barely 0.10%
• Dividend yield is around 2%, a little over what is available if you were to hold SPY but a good 40 bps more than if you held IWV.
• The year-to-date gain is about 11.9%, in line with IWV and a bit better than the performance of SPY though as the chart above shows, performance  clearly exceeded IWV since last October.

Conclusion –

The Wisdom Tree Total Earnings Fund is a broad-based ETF that is focused on holding those stocks that represent the largest earnings streams in the US stock market. Its tilt toward large cap stocks keeps it closely correlated to the S&P 500 but the ETF has provided a bit more downside protection since the market bottomed in 2009 which has smoothed performance slightly.

Another benefit is that the ETF is among the group of commission-free ETFs available to users of E*TRADE. This is important. A trader can use the commission-free aspect to offset the higher than average expense ratio.

This ETF won’t offer a dramatic improvement over tried and true ETFs like SPY or IWV but it may have a place in your portfolio if you are interested in alternative indexing methodologies and wish to have a slightly smoother ride over the peaks and valleys of the markets.

Disclosure: no position at this time in any ETF mentioned in this post but I am strongly considering entering a small position in EXT in the very near future