One on One With Bruce Lavine, President of Wisdom Tree Investments
Tuesday, August 22, 2006
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SUSIE GHARIB: Our guest tonight is one of the newest players in the fast growing field of ETFs or exchange traded funds. Bruce Lavine is the president of Wisdom Tree Investments. The New York firm launched 20 ETFs that focus on dividend stocks in the U.S. and abroad. Bruce, nice to have you on our program.
BRUCE LAVINE, PRESIDENT, WISDOM TREE INVESTMENTS: Thanks for having me, Susie.
GHARIB: Let`s begin by just getting a sense of what`s unique about Wisdom. There are so many ETFs available right now. What makes Wisdom unique?
LAVINE: Sure. What Wisdom Tree is doing is really building on two very successful concepts. First the indexing concept where there`s five trillion under management globally and ETF where there`s about $350 billion under management. What we`re doing differently is we have a unique style of weighting our indexes. Most ETFs are capitalization weighted and we think this is a flawed structure. We think capitalization weighted ETFs tend to have over weightings in the overvalued securities and under weightings of undervalued securities. Instead of focus on capitalization weighting, we focus on a fundamental metric of value and we`ve chosen dividends. So our funds, all 20 of them, are constructed with one methodology using the cash dividends paid by the companies.
GHARIB: All right. So in terms of how that`s different than these market cap weighted ETFs is what? Can you just explain it a little better?
LAVINE: Sure. If you think about what happened with market cap weighted index perhaps in Japan in the late `80s or with the Internet boom in the late `90s, you have market caps going very high in names like Amazon and Yahoo! and investors who want to index being forced into those names at very high points. With our funds, what you have is a set of funds that have higher yields. All of the securities in our funds are dividend paying securities and you`re likely to have a sense of bear market protection built into the portfolios so we would expect to do better in downturns, to do equally well in modest market cycles and then to under perform at the very top of the markets where markets get frothy.
GHARIB: Now I understand that so far, your ETFs are performing rather well, but what do you say to investors who are perhaps hesitant to invest in these kinds of indexes because there isn`t any kind of long-term historic data in terms of performance.
LAVINE: Sure. There`s a tremendous amount of research that went into creating the Wisdom Tree indexes both by the Wisdom Tree people, by Professor Jeremy Seagal (ph) from the Wharton School and many other academics who have looked at this concept of using value-based metrics to weight portfolios. So there`s a lot of evidence that this is a good thing for long-term returns for investors and the portfolios we created in back tests had much, sorry, they had higher returns with less volatility. And the signal was consistent and persistent across many market cycles and many segments of the market, large cap, mid cap, small cap, countries, regions. We`ve now gone live. We have about two months of performance and we`re off to a good start. All of our domestic funds, there`s six of those, they`re ahead of their benchmark. Our large cap for example is about 180 basis points ahead of the S&P 500 since it launched on June 16 and that`s through yesterday. So we`re quite pleased.
GHARIB: That`s great. Congratulations on that. I want to talk about something you mentioned a moment ago. You said that your funds are bear market proof. Tell us what you mean by that. LAVINE: I don`t want to say that they never go down by any means but, we have high dividend paying companies in them and that tends to give a buffer when markets go down as a result and so we have high quality companies. You have to be generally earning income if you`re going to be paying out dividends which makes us different than some indexes which have money losing companies in them.
GHARIB: Now some of the issues that have been worrying investors as you well know have been high oil prices, geopolitical concerns, the outlook for interest rates. To what extent are these issues a factor in the performance of ETFs?
LAVINE: Oh, I mean the ETFs are affected by all the factors like any other fund. I think what we`ve done that`s unique is we`ve created an actionable set of funds for investors who can buy around the globe, 20 funds that give them very specific access to the dividend streams of corporate America and corporate Japan, corporate Europe, corporate Asia. And so you`ve packaged up something very attractive with high yields and made it very easy for investors to get access. All 20 funds trade on the New York Stock Exchange. You can find all our tickers on wisdomtree.com. So we`re well suited to this type of market environment by having such high quality, high dividend paying companies in the indexes.
GHARIB: All right, Bruce. Thank you very much. It`s been very informative talking with you.
LAVINE: Thanks very much Susie.
GHARIB: We`ve been speaking with Bruce Lavine, president of Wisdom Tree Investments.
