ETFs moving on from cap-weighted indexes: WisdomTree

A pioneer of in-house indexes discusses some trends taking hold in the industry

ETFs moving on from cap-weighted indexes: WisdomTree
ETFs have mostly been recognized as passive instruments, tracking traditional indexes that choose constituents based on their market capitalization. But according to one ETF-indexing innovator, investors are ready for something new.

WisdomTree believes our smart-beta ETFs can help investors by either enhancing overall returns, providing more dividend income potential, providing unique exposures, or reducing volatility relative to traditional capitalization-weighted index funds or actively managed mutual funds,” said Luciano Siracusano, WisdomTree's chief investment strategist, in an interview with Investor’s Business Daily.

As one of the first ETF providers to launch funds based on proprietary stock indexes, WisdomTree is recognized as an intellectual leader in the space. When asked for his thoughts on the next biggest trend among providers, Siracusano said he expects greater interest in “dynamic hedging” of foreign currency exposure given the weakening of the dollar this year.

“Another emerging trend is investor preference for the stocks of emerging-market companies that are not owned in large measure by the governments in those regions,” he said. Citing historically low returns from the asset class over the past decade, he said the firm expects some of the most compelling opportunities for returns from emerging markets over the next few years “despite strong flows and performance year-to-date.”

“The currencies have also strengthened considerably over the past 18 months relative to the US dollar,” he said. “This has helped to increase returns for US investors invested in EM stocks and EM bonds issued in local currency.”

Weighing in on the long-standing active vs. passive debate, Siracusano said his firm believes “beta” or “factor” exposures through index-based approaches provide better value than active management. He went on to say that he thinks the next real debate will be “passive vs. passive, or beta vs. smart beta,” and how the two strategies can be blended to get the best outcome for investors.

“That creates a big opportunity for ETF managers and for mutual fund managers that use ETFs to add value for clients through deft asset allocation,” he said.

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