This fund leans toward larger and more profitable U.S. dividend stocks, which keeps its risk down.

fundcoverage@morningstar.comDLN
by Adam McCullough
5/14/2019
WisdomTree LargeCap Dividend

WisdomTree U.S. LargeCap Dividend ETF DLN is a great U.S. large-cap dividend strategy. Its broad portfolio diversifies risk, and its weighting approach effectively balances targeting dividend yield without taking on too much risk. The fund's cost advantage contributes to its edge over its peers and supports its Morningstar Analyst Rating of Bronze.

The fund offers broad exposure to large-cap U.S. dividend-paying stocks and weights them by the total value of dividends that each stock is expected to pay during the next year. This fundamental-weighting approach balances firm size (larger companies tend to make higher aggregate dividend payments) against yield. When the fund rebalances back to its target dividend weightings each December, it adds to names that have become cheaper relative to their dividends and trims positions that have become more expensive. This contrarian rebalancing discipline contributes to the fund's value tilt.

This portfolio effectively balances the trade-off between targeting dividend yield without incurring too much risk. Its broad reach of 300 stocks limits its exposure to firm-specific risk and the highest-yielding stocks, which are more likely to cut their dividends than their lower-yielding counterparts. Although the fund doesn't screen its holdings for profitability or dividend sustainability, a few dividend cuts across its portfolio shouldn't significantly impact its performance because it is broadly diversified and skews toward larger, more stable names. The fund is well diversified across sectors, although as of this writing, it has greater exposure to consumer staples and energy stocks than the Russell 1000 Value Index, and less exposure to consumer discretionary and information technology stocks.

This approach has paid off. Over the past decade through April 2019, the fund bested the large-value Morningstar Category average and Russell 1000 Value Index by 1.8 and 1.0 percentage points, respectively, with lower risk. The fund's consumer staples sector overweighting contributed to most to its outperformance.



Portfolio Construction

This fund earns a Positive Process Pillar rating because it follows a well-crafted dividend-weighted strategy that effectively diversifies risk and rebalances into stocks as they become cheaper relative to their dividends. The fund tracks the WisdomTree U.S. LargeCap Dividend Index. This index selects the 300 largest companies by market cap from the WisdomTree Dividend Index, which includes most U.S.-listed dividend-paying stocks. Qualifying stocks must have an indicated regular cash dividend and market caps greater than $100 million and meet trading liquidity requirements. Stocks do not need a long history of dividend payments to qualify for inclusion. The benchmark weights each constituent by the value of dividends it is expected to pay over the next year, relative to the aggregate value for the portfolio. WisdomTree caps sector weightings at 25% of the portfolio and limits the weighting of its largest holdings. The cumulative weighting of the fund's stocks with greater than 5% weights is capped at 50% of the total portfolio. The portfolio rebalances annually in December. Because the fund focuses on dividend payments rather than faster-moving dividend yields, its turnover has averaged about a fourth of the turnover level of the average fund in the category.

Fees

WisdomTree levies a low 0.28% expense ratio on this fund. This fee is a fraction of the 0.74% median toll that the fund's large-value peers charge and supports its Positive Price Pillar rating. Over the trailing three years ended April 2019, this fund lagged its underlying index 32 basis points per year, a bit more than its average annual fee.

S&P 500 index data: S&P 500 Copyright @ 2019

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