WisdomTree US MidCap Dividend ETF is a shrewd contrarian fund with bells and whistles that abate much of the risk associated with its rebalancing approach. Sound diversification and a low fee add to its appeal and solidify a Morningstar Analyst Rating of Silver. 

The WisdomTree MidCap Dividend Index, which this fund fully replicates, puts a smart twist on a proven strategy. It weights about 350 of the mid-cap market’s dividend stocks by their projected cash dividends—a standard fundamental approach—then boosts those with the best combined quality and momentum characteristics by 50%. The extra layer of factor considerations should reduce exposure to stocks whose dividend policies conceal their shaky fundamentals. It also helps the portfolio handily exceed the Russell Mid Cap Value Index in profitability metrics like return on invested capital. That indicates sound exposure to the quality factor, which has historically been tied to market-beating returns.

When this fund restores stocks’ dividend weights at each annual rebalance, it effectively doubles down on firms whose valuations have declined relative to their dividends and peers and trims exposure to the best performers. While that may cause the fund to cling to some unworthy companies and prematurely cut ties with some winners, this buy-low-sell-high tack has paid off over time: The fund’s 9.55% annualized gain ranked well within the mid-cap value category’s top quintile over the 15 years through March 2023. 

Leaning into beaten-down stocks gives this fund a more pronounced value tilt than the Russell Mid Cap Value. So, it can fall behind when the value factor slumps, like in 2019 and 2020. Sector- and holding-level constraints help the fund diversify better along other dimensions. The top 10 holdings represented less than 10% of the portfolio as of March 2023, and no sector exceeded financials’ 23% portfolio weight.

Analyst Rating

A smart twist on a proven dividend approach.

Analyst

Ryan Jackson

Packaging Corp of America

Chesapeake Energy

Vistra Energy

Watsco

Ares Management

International Paper

NetApp

Snap-on

Fidelity National Financial

Carlyle Group

Quality and momentum considerations smooth over some drawbacks to this fund’s dividend-weighting approach, a time-tested strategy that unearths undervalued companies. Pairing that balance with sound diversification should translate to strong risk-adjusted performance, meriting an Above Average Process Pillar rating.

WisdomTree ranks all U.S. stocks by a composite factor score that considers firms' industry-relative quality (return on assets, return on equity, gross profits, cash flow) and momentum characteristics (six- and 12-month risk-adjusted performance). The WisdomTree U.S. Dividend Index, this benchmark's parent index, absorbs all the dividend stocks from this universe except those whose composite scores rank in their market-cap segment's bottom decile. It also filters out firms whose dividend yields rank in the top 5% if their composite factor scores rank in the bottom half. These measures help the index avoid value traps.

After the large-cap index absorbs the largest 300 dividend stocks, this index claims those that represent the largest 75% of the remaining universe. It weights companies by their total projected annual cash dividend. Stocks whose composite factor scores rank in the top quintile see that number modified upward by 50%. The index removes the riskiest stocks and deliberately overweights more profitable, high-momentum ones.

The index applies several constraints to reduce concentration at each rebalance. No sector weight may exceed 25% of the portfolio, and all stocks that weigh more than 5% may not collectively exceed 50% of the portfolio. Should any holding breach 24% of the portfolio, the index sends it back to 20%. Also, stocks cannot weigh more than triple or less than one third of their market-cap weight. Constituents that cross those thresholds are automatically returned to the nearer of the two guardrails.

The index rebalances annually each December. Returning holdings to their dividend weights requires doubling down on stocks whose valuations have slid and cutting back exposure to those on the rise, provided that dividends remain consistent. The fund will overweight some stocks whose valuations slide for good reasons, but the composite risk factor screen should limit these instances and help identify undervalued firms.

Above Average

Process

A team at Mellon subadvises this portfolio. While the team has navigated a recent complete overhaul, Mellon’s solid index-tracking resources and global trading desk remain intact. It retains its Average People Pillar rating.

Marlene Walker Smith was named Mellon’s head of equity index portfolio management following Tom Durante’s retirement in June 2021. She heads up a fresh roster of named managers on this fund; none of the current managers were listed on this fund before October 2020. Walker Smith should prove ready for the task. She started with Mellon in 1995 and long served as a behind-the-scenes portfolio manager under Durante. Plus, her predecessor’s retirement was planned, allowing her to benefit from a comfortable transition.

Each of the four managers that report to Walker Smith—David France, Todd Frysinger, Vlasta Sheremeta, and Michael Stoll—are backed by an associate portfolio manager and at least one index analyst. This support should help the managers focus on tax efficiency and carve out other advantages at the margin. Manager compensation is not tied to index tracking performance. However, the management team is subject to independent risk oversight from both Mellon and WisdomTree.

Average

People

WisdomTree is improving, but its shaky global fund lineup and uncertain trajectory hold its rating to Below Average. 

WisdomTree’s research organization has long been a strength. Under CIO Jeremy Schwartz, the team has generated creative, economically sound ideas and evolved them into investable products, like the efficient core series. A recent focus on investor education spawned the Portfolio Analysis Tools Hub, an online platform that taps the team’s brainpower to help investors make better investment decisions.

The firm’s product lineup is a mixed bag. To complement its core lineup of fundamentally weighted strategies, WisdomTree has recently launched funds targeting established factors instead of trendy themes—an encouraging reorientation. Yet the shutdown of WisdomTree U.S. Growth and Momentum ETF calls WisdomTree’s commitment to these funds into question, and vestiges from its laxer product-development era look ripe for closure. Its European lineup features risky trading tools that are hard for investors to use well. 

WisdomTree’s future may hinge on WisdomTree Prime, its blockchain-based digital wallet. The launch reflects founder and CEO Jonathan Steinberg’s conviction in the disruptive potential of the blockchain. Prime shouldn’t hurt WisdomTree fund investors (most funds on the platform are zero-fee), but it may distract the firm from shoring up its core offering.

Below Average

Parent

WisdomTree U.S. MidCap Dividend Fund

DON tracks a dividend-selected and -weighted index of mid-cap stocks.

There are increasingly credible reasons for midcap equities and related ETFs to shed their status as an overlooked asset class. Should that happen, ETFs such as the WisdomTree U.S. MidCap Dividend Fund (DON) could come back into focus for advisors and investors.

Midcap Stocks, ETFs Should Shed Overlooked Status

Looking for broad exposure to the Mid Cap Value segment of the US equity market? You should consider the WisdomTree U.S. MidCap Dividend ETF (DON), a passively managed exchange traded fund launched on 06/16/2006.

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A smart beta exchange traded fund, the WisdomTree U.S. MidCap Dividend ETF (DON) debuted on 06/16/2006, and offers broad exposure to the Style Box - Mid Cap Value category of the market.

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DON, with its smart-beta dividend-centered strategy, has an alluring high-single digit earnings yield, something investors on the lookout for sound value stories would definitely appreciate. On the negative side, other indicators are not that great, as only a third of holdings have a B- Valuation grade. I would prefer a larger allocation. Also, we see fairly subdued growth characteristics. Performance is only average, and sometimes even below average.

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