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The vast majority of ETFs currently on the market utilize market capitalization levels for their weighting schemes. This means that the biggest firms, in terms of stock price multiplied by shares outstanding, carry the biggest weight in most ETFs.

While this is by far the most popular way to assign weights, it is by no means the only way out there. In terms of alternative weighting systems there are plenty including revenue, dividend, and an often overlooked one in earnings weighted (see Alternative ETF Weighting Methodologies 101).

This system gives the biggest weights to the firms that have earned the most in the given year, focusing in on value companies, but also large caps from a different angle. When compared to traditional market cap focused funds, this could result in a lower volatility play that may not experience as big of booms and busts as its market cap focused peers.

Why Earnings?

This approach could be the way to go as while a number of factors come in to play for stock performance, arguably the most important over long time periods is earnings. These profits fuel expectations and models, company prospects, and are generally speaking, the lifeblood of any business and weighting towards this key metric only makes sense.

It could also help to reduce risk and mitigate uncertain companies in the investment picture that have not found a way to turn a profit and may never be able to do so. This strategy could also reduce volatility, although it seems likely to leave investors more concentrated than in a broad benchmark technique which will also include firms that aren’t earning anything at all (also see What is an Equal Weight ETF?).

For investors seeking to do this in ETF form, there is actually a small lineup of U.S. focused ETFs that accomplishes this task. Below, we profile in greater detail these ETFs for investors who are seeking to zero in on firms that are making money in order to reduce volatility in this uncertain market environment, while focusing on one of the most important aspects of stock investing at the same time:

WisdomTree MidCap Earnings ETF (EZM - ETF report)

This ETF tracks a mid cap earnings index, charging investors 38 basis points a year in fees. The product holds over 600 stocks in its basket, putting about 19% in consumer cyclical, 17% in industrials, and 16% in technology.

The top three stocks account for roughly 4% of assets, while the top ten is less than 10% of assets, suggesting that the product is quite spread out. This is also true from a style perspective, although there is definitely a tilt towards value as growth accounts for just 22% of assets (see Mid Cap ETF Investing 101).

A comparable market cap weighted mid cap ETF, (MDY - ETF report), charges investors just 25 basis points in comparison and holds about 400 stocks in its basket. Top holdings are different, while the biggest three sectors are industrials, technology, and consumer cyclicals suggesting a similar but slightly different breakdown.

WisdomTree SmallCap Earnings ETF (EES - ETF report)

This fund gives exposure to a small cap benchmark, charging investors 38 basis points for its services. It holds nearly 1,000 securities in total with financials, tech, and consumer discretionary taking the top three spots.

Micro cap securities do account for much of the fund, while once again value is the biggest single style. In this particular case, value is over 55% of the product, leaving just 24% for growth and the rest to blend stocks (read Three Impressive Small Cap Dividend ETFs).

A comparable small cap fund is (IWM - ETF report), a popular product that beats out EES in terms of expenses and total number of holdings, but uses a market cap approach. Growth stocks make up about 33% in this product, while tech, industrials, and consumer discretionary are the three biggest sectors.

WisdomTree Total Earnings ETF (EXT - ETF report)

For a broader look at earnings generating stocks across market cap levels, investors have EXT, a fund that charges 28 basis points a year in fees. The product holds over 1,350 stocks in total, putting a focus on tech, financials, and energy.

While it may be spread out across cap sizes, it is still focused on large caps as these account for nearly 80% of the total. Value securities make up nearly 46% of assets, leaving just 29% for growth stocks in this ETF (read Comprehensive guide to Total Market ETFs).

A popular competitor in the market cap space is (VTI - ETF report) from Vanguard, an ETF that charges just six basis points a year in fees and holds about 1,350 securities. It is slightly less concentrated in large caps and also has a bit more in growth stocks than its WisdomTree counterpart

WisdomTree Earnings 500 ETF (EPS - ETF report)

This ETF is appropriate for those seeking an earnings weighted approach to the S&P 500, as it holds about 500 large cap stocks while charging 28 basis points a year in fees. Top sectors include tech, financials, and energy, with the top stocks including XOM, AAPL, and CVX.

Value stocks account for about 46% of assets with growth accounting for 30% of EPS. Meanwhile, from a cap look, large caps make up about 90% of assets while mid caps account for the rest of this concentrated fund.

A good comparison for this ETF from a cap perspective is (SPY - ETF report), the world’s most popular ETF. This fund also has about 500 securities, a focus on AAPL and XOM, slightly less of a holding in mid caps and value securities.

 

 

Performance Comparison Two Years

 

 

Market Cap

Earnings

Small Cap

IWM

7.70%

EES

8.90%

Mid Cap

MDY

13.00%

EZM

16.00%

Large Cap

SPY

15.30%

EPS

15.60%

Broad Market

VTI

14.66%

EXT

15.24%

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