WTV - WTV: Excellent Shareholder Yield Fund That Would Appeal To Quality Investors

Summary

• WTV offers exposure to a carefully calibrated cohort of U.S. stocks sporting substantial shareholder yields backed by robust quality.
• WTV changed its strategy in the past, abandoning the WisdomTree U.S. LargeCap Value Index in December 2017 and opting for an active approach with a focus on the shareholder yield.
• WTV beat a few peers in the past and chugged along when the market was jittery.
• I would opt for a Buy rating as its portfolio has a solid earnings yield coupled with adequate forward EPS growth, brilliant quality, and comparatively strong returns.

The WisdomTree U.S. Value Fund ( WTV ) offers exposure to a carefully calibrated cohort of U.S. stocks sporting substantial shareholder yields backed by robust quality.

This is a beautiful concept designed to capture returns stemming not only from the expansion of trading multiples like Price/Earnings and Enterprise Value/EBITDA supported by improvements in underlying financial metrics that bolster capital appreciation but also from another potent yet frequently overlooked driver, namely from shareholder rewards which amalgamate dividends as well as buybacks. At the same time, the quality screen removes the risk of yield traps (or names that are destroying value by using borrowings to reduce the share count and artificially inflate the EPS) influencing its performance.

Did WTV succeed in its pursuit of shareholder yield-driven returns? If it did, what might hinder it from yielding meaningful returns in the future? Are there any hidden vulnerabilities investors should not ignore? Let us discuss all these matters in greater depth below.

Essentials of WTV strategy

WTV underwent a strategy change in the past as it abandoned the WisdomTree U.S. LargeCap Value Index in December 2017 opting for an active approach with a focus on the shareholder yield. In this regard, in the performance analysis section below, I will only assess returns delivered during the January 2018 - January 2023 period.

It is also of note that before January 2022, as mentioned in the annual report which can be found on its website , the ETF had a different name, the WisdomTree U.S. Quality Shareholder Yield Fund, with the ticker being QSY.

What is the cornerstone of its strategy today? In short, as described in the prospectus, the goal is to select about 200 stocks that sport high total SY which is essentially a sum of dividends paid and the funds directed to share repurchases as well as decent quality manifested in substantial Return on Equity and Return on Assets. However, it seems the 200 target is not set in stone as the WTV portfolio had just 124 holdings as of February 15.

Now, let me elaborate on what I like most about this vehicle.

Pros

WTV beat a few peers in the past, chugged along when the market was jittery

First and foremost, even though WTV was not spared by the calamitous bear market last year, it did fare relatively well compared to a few peers, including the passively managed Invesco BuyBack Achievers ETF ( PKW ), iShares Core Dividend ETF ( DIVB ), which tracks the Morningstar US Dividend and Buyback Index, as well as the iShares Core S&P 500 ETF ( IVV ), which approximates the performance of the market.

Created by the author using data from Portfolio Visualizer

On the negative side, it failed to outperform the actively managed Cambria Shareholder Yield ETF ( SYLD ) as well as Principal Value ETF ( PY ).

Nevertheless, longer-term returns look much brighter. For example, during the January 2018 - January 2023 period, WTV delivered the strongest compound annual growth rate even compared to the market. The disappointment to mention is that risk-adjusted returns (the Sharpe and Sortino ratios) are close to being the weakest in this group.

Created by the author using data from Portfolio Visualizer

Quality is beyond reproach

Using ROE and ROA, the fund did a great job selecting only top-quality names. To corroborate, over 91% of the holdings have an at least B- Quant Profitability grade, which means these stocks are close to being at the top of their sectors both in terms of margins and capital efficiency. For example, among the financial sector firms (the major allocation, 19.8%), almost all the names are either A- or B-rated, with the exception being Equitable Holdings ( EQH ). In fact, EQH and Liberty Broadband ( LBRDK ) are the only two companies that solidly underperform their respective sectors (financials and communication) in terms of profitability, with D- grades.

Next, even though firms incapable of delivering even a diminutive profit are present, their weight is just 4.4%.

For better context on ROE and ROA that the fund's investment adviser uses to measure quality, I should mention that the weighted-average ROA stands at 10.4%, as per my calculations, an excellent result. Speaking of ROE, I find it less reliable at 42.3%, an incredible level, yet skewed by comparatively large level of debt. For example, NetApp ( NTAP ), a cloud computing player with a 0.8% weight in WTV, has a Debt/Equity of about 224% which makes its ROE of over 150% irrelevant.

Expenses are paper-thin, while liquidity is adequate

WTV comes with an expense ratio of 12 bps , which is fairly small even by passive ETF standards. This is nothing short of attractive for an actively managed vehicle. At the same time, liquidity is relatively adequate as AUM stands at ~$134 million.

Cons

Maximalist value investors might be dissatisfied

WTV contains 'value' in its name, which does not mean the portfolio should always appeal to value investors. In reality, there are a few points they could dislike.

For example, as the weighted-average market capitalization is at about $37.8 billion, a significant share of holdings could be priced at a premium to their respective sectors. More specifically, over 32% of stocks in this mix have a D+ Quant Valuation rating and worse, which is a risk not to ignore. Meanwhile, ~32% have a B- grade and higher, an adequate level for a large-cap mix.

Delving deeper, the WA earnings yield is at 11%, as per my estimates, which translates into a P/E of only 9x specifying a solid discount to the market which now trades at 20.6x. So even though maximalist value investors might be dissatisfied, those seeking a modest balance of inexpensiveness and quality would likely find this ETF appealing.

Numerous non-dividend-paying stocks in the mix

Please do not overlook that WTV favors stocks returning capital to shareholders via dividends as well as share repurchases, which implies a significant share of its holdings might not pay a dividend at all.

In the current version of the portfolio, 18.3% of the net assets are allocated to such companies. For instance, Zillow Group ( Z ), a digital real estate player, the fund's third-largest holding with about 1.2% weight, does not pay a dividend . Last year, however, Z was actively reducing the share count; as the CFO said during the recent earnings call ,

We repurchased a total of 22 million shares for $947 million in 2022, which translates to an average share price of approximately $43 per share.

So if an investor is looking for a dividend & buyback exposure, not only the latter, this ETF is likely a pass for her or him.

Final thoughts

WTV is an excellent ETF for shareholder yield exposure with quality in mind.

Even though there is something to dislike about this vehicle, I would opt for a Buy rating as its portfolio has a solid earnings yield coupled with adequate forward EPS growth (~11%), brilliant quality, and comparatively strong returns, though with a caveat that its strategy was changed in 2017.

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