Thursday, June 02, 2011

Find The Wisdom At Wisdom Tree

The financial services sector needs innovation as much as any other part of the economy.  That's the only way to achieve growth and deliver value over the long-term.  The bad news about innovations is that many of them don't work out as intended. 

Wisdom Tree rolled out ETFs based on value-adjusted weights rather than market cap weights.  A fine idea, until the underlying fundamentals of the ETFs' constituents demand broader portfolios.  The firm recently announced major changes to the composition of several of its ETFs.  The problem with value weights is that changing economic conditions will demand more rapid changes in portfolio composition as the ETFs' holdings become even broader.  This will raise transaction costs and make these ETFs less competitive than index-based products from Vanguard, BlackRock, and other players who compete primarily on cost. 

Wisdom Tree's experiment in ETF construction is necessary.  It will run its course.

Full disclosure:  No position in any Wisdom Tree products.