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WISDOMTREE & SMART BETA

In the past two decades, exchange-traded funds (ETFs) have exploded onto the investment scene. New ETFs are coming to market all the time. And although ETFs still represent a much smaller piece of the investment pie than mutual funds overall, they are growing rapidly. And they are growing at the expense of mutual funds. In fact, ETFs took in nearly $180 billion in 2013, which represented a 14% organic growth rate for the U.S. ETF industry.1 And many experts, including top-rated financial advisors, believe that ETFs may displace mutual funds within the next 10–15 years.2 As of the most recent quarter, there are more than 1,300 ETFs trading in the U.S. marketplace target a wide array of regions, sectors, commodities, bonds, futures and other asset classes. Their numerous benefits—including easy diversification, low cost3, tax efficiency and the convenience of stock trading flexibility—have helped this newer type of investment to flourish. And there are many other drivers that will likely help this industry continue to grow over the coming years. Of course, diversification does not eliminate the risk of experiencing investment losses. One of these drivers is the continued growth and acceptance of what has come to be known as “smart beta” ETFs. What is smart beta? Before we get into this, let’s briefly review a bit of ETF—and finance theory—history. BETA4 AND THE “EFFICIENT MARKET” The very first ETFs—and the majority of those that followed—were based on market capitalization-weighted indexes. You may be wondering why. Consider that the measurement of the volatility5 of an investment compared to the market is known as “beta.” These ETFs mirror these indexes in an effort to help provide investors with a portfolio that seeks to deliver the same risk, and moves in the same way, as the market; thus the term “beta” has become synonymous with broad market representation. But if you want to understand why these indexes are market capitalization weighted, we need to go a bit further. Market capitalization-weighted indexes, the bulk of indexes in existence today, weight individual components by their stock market capitalization (price per share times shares outstanding). This approach is supported by what is known as the Efficient Market Hypothesis, a widely accepted theory that claims the market price of any security is always the best unbiased estimate of a firm’s true underlying value (i.e., its “fundamental value”) and that no other information that can be easily obtained will give a better estimate of the stock’s fundamental value. Taken a step further, this theory implies that capitalization-weighted indexes deliver the highest expected returns given any level of risk and the lowest possible risk for any given return—making them “mean variance efficient,” which would mean that they offer the optimal risk/return ratio regardless of an investor’s risk tolerance. So, if the Efficient Market Hypothesis holds, any portfolio that does not weight individual stocks by market capitalization will not be mean-variance efficient and therefore will not offer these desirable risk/return characteristics. But what if markets are not always efficient?
Source: Bloomberg, WisdomTree. Source: John Spence, “Can ETFs Ever Top Mutual Fund Assets?” ETF Trends, 11/27/12. 3 Ordinary brokerage commissions apply. 4 Beta: Measure of the volatility of an index or investment relative to a benchmark. A reading of 1.00 indicates that the investment has moved in lockstep with the benchmark; a reading of -1.00 indicates that the investment has moved in the exact opposite direction of the benchmark. 5 Volatility: A measure of the dispersion of actual returns around a particular average level.
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6 7 WWW. where stocks are first divided into tiers based on certain factors. such as equities. let’s take a look at “smart beta.” Some define smart beta as simply any type of index that is not market capitalization weighted. returns of traditional. the smart beta approaches that are attracting the greatest attention in the world of equity indexing today are as follows: + Equal Weight Indexes: Components are often selected from established indexes like the S&P5008. experience periods of irrational bubbles and frenzies—as evidenced by the Information Technology sector in the United States during the late 1990s—that can cause their prices to deviate widely from their fair value. al. it is subject to challenge. the prices realized on these trades are often not representative of the best. Performance is now bearing out the idea that market capitalization weighting may not be the best method of indexing. Conventional wisdom has long recognized that prices of speculative assets. fiduciary. So. WisdomTree believes that stock price movements are better explained by a different hypothesis—the Noisy Market Hypothesis—a term coined by Professor Jeremy Siegel. Momentum traders: Individuals whose buy and sell decisions are influenced more heavily by recent price performance than any other factors. + Fundamentally-weighted Indexes: Components are selected to provide broad exposure to an equity market based on market capitalization. but companies are weighted by a fundamental factor such as aggregate dividends or earnings.909. Senior Investment Strategy Advisor to WisdomTree and Russell E. market capitalization-weighted indexes lagged various fundamentally weighted—or smart beta—indexes by as much as 2% per year from 1969-20117. although the majority of ETF assets in the market today track cap-weighted indexes.WISE (9473) . March 2013.COM 866. it is just one of several theories that seek to explain broad movements in stock prices. + Factor-based Indexes: Components are selected based on one or more fundamental factors and are weighted based on one or more fundamental factors. they typically buy after upward movements and sell after downward moves. There is persuasive evidence that markets are not always efficient and that stock prices can deviate from their fundamental values for many reasons. Palmer Professor of Finance at The Wharton School of the University of Pennsylvania. helping to legitimize the category of smart beta as a viable alternative to traditional cap-weighted indexes. and then equal weighted within the tiers. Consequently. Consider that. designed to represent the performance of the leading industries in the United States economy. et. passive indexes have attracted tens of billions of dollars in assets in recent years. unbiased estimate of the fundamental value of the shares. sometimes for liquidity.WISDOMTREE. ETFs tracking such rules-based. According to Cass Consulting. the prices of individual stocks will not always be efficient. it may not be surprising that alternative methods are growing in popularity.WisdomTree & SMART BETA [ January 2014 ]2 THE NOISY MARKET HYPOTHESIS While the Efficient Market Hypothesis has had tremendous influence in the finance profession. + Low Volatility Indexes: Components are selected because they have exhibited lower volatility than the overall stock market and/or are weighted based on their historic volatility. SMART BETA DEFINED Now that we’ve discussed beta and market theory. In our opinion. a research-led consultancy service provided by Cass Business School. investors and institutions often buy or sell shares for reasons unrelated to the valuation of the firm. tax—or even emotional—reasons. Factor-based Indexes can also be modified equal weighted. Furthermore. “An Evaluation of Alternative Equity Indices Part 2: Fundamental Weighting Schemes. As with all theories. Andrew Clare. but are equally weighted so that all components have identical weights when rebalanced.” Cass Business School. 8 S&P 500 Index: A market capitalization-weighted benchmark of 500 stocks selected by the Standard and Poor’s Index Committee. if traders such as momentum traders6 speculate on the basis of past price movements or are motivated by “noise” such as rumors or incomplete or inaccurate information.

market have outperformed the majority of active managers in their respective peer groups.S.EES 9 1-Year 1. earnings weighted ETFs have outperformed their competitive capitalization-weighted benchmark. value and profitability than stock price alone. these totals are added for all constituents. Today.” From there we applied the same methodology to the earnings-generating segments of the market to expand our offering. put simply. Our domestic family of earnings ETFs: + Includes only profitable companies + Weights stocks by their contribution to the Earnings Stream9 + Rebalances to relative value on an annual basis PERCENT OF PEERS BEATEN IN RESPECTIVE MORNINGSTAR CATEGORY [ as of December 31. dividend-weighted ETFs — all of which are categorized as “value” by Morningstar —outperformed the major cap-weighted “value” benchmark in their asset class since their respective inceptions.EXT. WWW.COM 866. rather than merely measure the performance of all investable stocks in an equity market. We weighted these first ETFs by dividends or earnings because we believe these fundamentals offer a more objective measure of a company’s health. we use proprietary weighting methodologies designed to magnify the effect fundamentals— such as dividends or earnings—have on risk and return characteristics. How did they do this? By using a rules-based process to select and weight stocks. all four of WisdomTree’s core U. WisdomTree offers investors smart beta ETFs in all major equity markets around the world. 2013 ] Morningstar Category Large Blend .WISE (9473) .EZM Small Blend .619 423 699 3-Year 1.102 262 467 Earnings Stream: Earnings per share x the number of shares outstanding. For an index. In fact. WISDOMTREE SMART BETA HAS HISTORICALLY OUTPERFORMED ACTIVE MANAGERS Since their respective inception. THE INTRODUCTION OF SMART BETA Though many investors may only now be hearing about smart beta indexes and ETFs.WisdomTree & SMART BETA [ January 2014 ]3 So. inventing the concept of dividend-weighting equity markets.399 368 626 5-Year 1. the majority of our dividend. And the proof is in the performance. Four of WisdomTree’s five U.250 315 565 Since WisdomTree Fund Inception 1.and earnings-weighted ETFs providing exposure to the U.909.S. in 2006.WISDOMTREE.S. And. WisdomTree was an early pioneer in this category. calling them “fundamentally weighted. we launched one of the first families of alternatively weighted ETFs. EPS Mid-Cap Blend . Since their respective inceptions. or generate better risk-adjusted returns than the market. 2013 ] Ticker EXT EPS EZM EES Fund WisdomTree Total Earnings Fund WisdomTree Earnings 500 Fund WisdomTree MidCap Earnings Fund WisdomTree SmallCap Earnings Fund Fund Inception Date 2/23/2007 2/23/2007 2/23/2007 2/23/2007 Morningstar Category Large Blend Large Blend Mid-Cap Blend Small Blend 1-Year 71% 60% 88% 92% 3-Year 87% 84% 96% 86% 5-Year 85% 70% 95% 95% Since Fund Inception 84% 74% 98% 91% NUMBER OF MANAGERS IN EACH RESPECTIVE CATEGORY [ as of December 31. the difference between “beta” and “smart beta” may be the idea that smart beta seeks to provide an exposure with the potential to outperform the market. For these families. they have been around for some time.

33.254 430 383 3-Year 1.12% 33.86% 9.38% 2/23/07 EPS 0.WisdomTree & SMART BETA [ January 2014 ]4 AVERAGE ANNUAL RETURNS [ as of December 31.11% 5.DON Small Value .71% 17. 2013 ] Domestic Dividend ETFs Fund WisdomTree Total Earnings Fund Russell 3000 Index WisdomTree Earnings 500 Fund S&P 500 Index WisdomTree MidCap Earnings Fund S&P MidCap 400 Index WisdomTree SmallCap Earnings Fund Russell 2000 Index EES 0.56% 32. Ratio 0.m.72% 21.89% 25.43% 6. Market price returns reflect the midpoint of the bid/ask spread as of the close of trading on the exchange where Fund shares are listed. 18.55% 32.94% 25.64% 18.089 378 321 5-Year 988 319 267 Since WisdomTree Fund Inception 805 260 224 WWW. 18.50% 45. WisdomTree shares are bought and sold at market price (not NAV) and are not individually redeemed from the Fund.81% 8.89% 25. may be worth more or less than their original cost.70% 16. current performance may be lower or higher than quoted.67% 5-Yr.82% 8.39% 40.76% 15.42% 6.93% 5.94% 25.11% 15.18% 20.74% 21.71% 17.19% 33.08% Since Fund Inception 6. Source: WisdomTree.50% 45.18% 38.28% Fund Inception Date 2/23/07 1-Yr.59% Performance is historical and does not guarantee future results.93% 5. Market price returns do not represent the returns you would receive if you traded shares at other times. 16.49% 16.64% 15.38% 2/23/07 EZM 0.86% 9.59% 1-Yr.28% 2/23/07 Fund Information Ticker EXT Exp.67% 5-Yr.WISE (9473) .48% 16. Total returns are calculated using the daily 4:00 p.93% 17.18% 18. Morningstar Direct.08% Since Fund Inception 6.86% 18.94% 15.DTD.64% 17.41% 38.67% 33.82% Total Return NAV (%) 3-Yr.18% 8. 2013 ] Ticker DTD DLN DHS DON DES Fund WisdomTree Total Dividend Fund WisdomTree LargeCap Dividend Fund WisdomTree Equity Income Fund WisdomTree MidCap Dividend Fund WisdomTree SmallCap Dividend Fund Fund Inception Date 6/16/2006 6/16/2006 6/16/2006 6/16/2006 6/16/2006 Morningstar Category Large Value Large Value Large Value Mid-Cap Value Small Value 1-Year 19% 16% 8% 32% 57% 3-Year 82% 82% 84% 83% 87% 5-Year 72% 60% 70% 63% 44% Since Fund Inception 69% 64% 28% 71% 50% NUMBER OF MANAGERS IN EACH RESPECTIVE CATEGORY [ as of December 31. Our domestic family of dividend-weighted Indexes: + Includes only dividend-paying companies + Weights stocks by their contribution to the Dividend Stream® + Rebalances to relative value on an annual basis PERCENT OF PEERS BEATEN IN RESPECTIVE MORNINGSTAR CATEGORY [ as of December 31.74% 16.24% 16.DES 1-Year 1.11% 5.39% 40.53% 32.24% 16. EST net asset value (NAV). 2013 ] Morningstar Category Large Value .80% 6.WISDOMTREE. DHS Mid-Cap Value . 16.18% 18.909. 33.88% 17. an investor’s shares.76% 6. when redeemed. DLN.55% 32.COM 866.18% 8. Performance data for the most recent month-end is available at wisdomtree.82% Market Price (%) 3-Yr.54% 33.38% 20.com.86% 18. Investment returns/principal value of an investment will fluctuate.

10 And.39% 32. Consider that U.35% 6.50% 33.69% 27.09% 8. or nearly one-third of new net inflows in 2013.50% 33.82% 34.38% 6/16/06 DHS 0. ETFs have grown at double the rate of mutual funds since January of 2009.64% Since Fund Inception 6.01% 7. this expectation seems attainable. January 2014.38% 6/16/06 DLN 0.08% 17.55% 32. respectively.49% 5-Yr. Total returns are calculated using the daily 4:00 p.87% 21.82% 34. 16.71% 16.06% 16.46% 36.18% 16.39% 32.59% 7. including market-cap weighted ETFs (48%)11. investors do not seem to agree.39% 20.64% 15.909. Blackrock.94% 16. Investment returns/principal value of an investment will fluctuate.67% 14.13 With growth expectations like this. more than half (53%) of institutional decision makers will increase their use of smart beta ETFs over the next three years—that’s more than any other ETF category.-listed ETFs tracking non market-cap weighted indexes gathered $65 billion.38% 6/16/06 DON 0. using only smart marketing rather than smarter investment methods. may be worth more or less than their original cost.49% 5-Yr.98% 7. 13 ”ETF Asset Growth Rate Sprints Ahead of Mutual Funds” from Investors Business Daily on October 25. “What You Need To Know About Strategic Beta”.67% 20.71% 16.42% 38.58% 6. with asset growth of 100% and 50%.41% 5. Market price returns do not represent the returns you would receive if you traded shares at other times. 2013 ] Domestic Dividend ETFs Fund WisdomTree Total Dividend Fund Russell 3000 Index Russell 3000 Value Index WisdomTree LargeCap Dividend Fund S&P 500 Index Russell 1000 Value Index WisdomTree Equity Income Fund Russell 1000 Value Index WisdomTree MidCap Dividend Fund S&P MidCap 400 Index Russell Midcap Value Index WisdomTree SmallCap Dividend Fund Russell 2000 Index Russell 2000 Value Index DES 0. We believe this could make smart beta the largest category of ETFs and the primary driver of ETF growth going forward. And when you consider that.16% 19.52% Market Price (%) 3-Yr. 12 Source: Investment Company Institute.67% 16.38% 16.03% 33.81% 8.00% 15.S.54% 20.99% 18.41% 8.COM 866.28% Fund Inception Date 6/16/06 1-Yr.39% 32.89% 6.64% 15.44% 32. we believe investors should beware of asset managers and investments that may be jumping on the bandwagon.67% 20.89% 21.31% 16. Market price returns reflect the midpoint of the bid/ask spread as of the close of trading on the exchange where Fund shares are listed.90% 16.6 trillion)12 in less than the one decade we previously mentioned.52% Total Return NAV (%) 3-Yr.86% 38.93% 16. 16.75% 15. a division of Market Strategies International.75% 9.55% 32.09% 15.97% 16.81% 9.WISE (9473) .wisdomtree. 16.92% 33.25% 16. an investor’s shares. Ratio 0.53% 24.94% 18.com.WISDOMTREE.59% 7.94% 16. as of 11/30/2013.17% 1-Yr.67% 16.43% 17.67% 14. when redeemed.41% 8. 16.28% 8.96% 33.97% 16. GROWTH OF SMART BETA WILL BE THE GROWTH OF ETFS While some industry insiders may worry that smart beta may be a fad.35% 32.72% 7.58% 6.92% 16. Morningstar Direct.18% 16.16% 19.75% 7. Marketwired.53% 32. WisdomTree shares are bought and sold at market price (not NAV) and are not individually redeemed from the Fund.46% 6.33% 32. according to Morningstar. EST net asset value (NAV).17% Performance is historical and does not guarantee future results.28% 16.28% 6/16/06 Fund Information Ticker DTD Exp. December 11.81% 21.64% Since Fund Inception 7. 27. Performance data for the most recent month-end is available at wisdomtree.06% 16. LP. To view the performance of our entire family of ETFs.35% 17.08% 17.96% 33.53% 24.06% 17. please visit www.06% 17. according to a new study conducted by Cogent Research.WisdomTree & SMART BETA [ January 2014 ]5 AVERAGE ANNUAL RETURNS [ as of December 31.43% 16. Source: WisdomTree. 2013. 2013.75% 16.59% 15.com.81% 8. perhaps helping to match equity mutual fund assets under management (currently $7.35% 6.10% 8.89% 6.24% 15.93% 16.46% 36.53% 32.46% 6.69% 27.m.75% 16. current performance may be lower or higher than quoted.89% 21. 28.24% 15. 10 11 WWW.29% 16.41% 5.28% 8.

Inc. call 866. risks. repeatable methodology that offers broad. WisdomTree’s family of smart beta ETFs has proven itself for more than seven years— which included an unprecedented market event14. Siegel is a registered representative of ALPS Distributors. Indexing can be highly efficient. Read the prospectus carefully before you invest. Investors seeking tax advice should consult an independent tax advisor. Information provided herein should not be considered tax advice. charges and expenses of the Funds before investing. Trading WisdomTree Funds will generate tax consequences and transaction expenses. which rebalance and weight equity markets based on income. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. and ETFs have a number of benefits that make them a wise way to invest and have led to their quick adoption and impressive industry growth. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile. and (3) is not warranted to be accurate. For more information on WisdomTree ETFs. Jeremy J. © 2014 WisdomTree Investments. nor its affiliates. The information contained herein: (1) is proprietary to Morningstar and/or its content providers. WisdomTree Funds are distributed by ALPS Distributors. performance. visit www. including possible loss of principal.909..WisdomTree & SMART BETA [ January 2014 ] When it comes to identifying smart beta. All Rights Reserved. we think investors should look for: + A rules-based. 14 6 Referring to the global financial crisis of 2008 and 2009.WISE (9473) or visit wisdomtree. smart structures or uncommon access to provide investors with the potential for income. (2) may not be copied or distributed. WIS006070 1/2015 WWW. nor ALPS Distributors. “WisdomTree” is a registered mark of WisdomTree Investments. Funds focusing their investments on certain sectors and/or smaller companies increase their vulnerability to any single economic or regulatory development.wisdomtree. diversification and more. We believe smart beta approaches like ours may help advisors and investors to: + Enhance portfolio returns + Reduce portfolio risk + Increase dividend income + Benefit from more complete diversification + And much more At WisdomTree. To obtain a prospectus containing this and other important information. 2014 Morningstar. ETFs are subject to risk similar to those of stocks including those regarding short-selling and margin account maintenance.909. Inc. Investors should carefully consider the investment objectives. Inc. we do things differently.com. If you can accept that price may not always be the best indicator of value—as history has shown time and again—you can appreciate the potential value of smart beta indexes such as WisdomTree’s. Inc. Neither WisdomTree Investments.. Diversification does not eliminate the risk of experiencing investment losses. This may result in greater share price volatility. complete or timely.com. You cannot invest directly in an index.WISDOMTREE. Inc. Inc. Tax consequences regarding dividend distributions may vary by investor. Our ETFs are built with proprietary methodologies.COM 866.WISE (9473) . representative exposure to an asset class + Alternative weighting methods that allow for ample investment capacity + High correlations to established benchmarks + Regular rebalancing + A proven track record on a total return and risk-adjusted basis CONCLUSION Investment managers and investors alike are always looking for better ways to invest. There are risks associated with investing. Inc. and its affiliates provide tax advice.