NEW YORK — Tiny WisdomTree Investments is taking on the goliaths of the quantitative investing world with a major push into dividend-based indexes.
The rationale: Over time, stocks that pay healthy and steady dividends perform significantly better than traditional capitalization-weighted indexes, and particularly during bear markets.
WisdomTree's total market index returned 11.9% annually for the 40-year period ended Dec. 31, 2004, besting the S&P 500 index by 140 basis points a year, according to a draft paper co-authored by Jeremy Siegel, author of "Stocks for the Long Run" and senior investment strategy adviser and board member at the firm.
The firm is launching a family of dividend-based indexes to the institutional market, representing its first products since announcing plans to become a money manager a year ago. It is riding the growing interest in alternatives to traditional cap-weighted benchmarks, notably Pasadena, Calif.-based Research Affiliates LLC's fundamental indexation approach, which uses dividends as one of six factors in setting stock weightings.
Research Affiliates' alternative indexation approach has garnered the attention of the $193.3 billion California Public Employees' Retirement System, Sacramento, and the $62.9 billion Washington State Investment Board, Olympia, and has won a $100 million mandate from the $6 billion South Dakota Retirement System, Sioux Falls.
Other firms offering dividend-based indexes or exchange traded funds include Standard & Poor's Corp., New York, which just unveiled three new indexes; Barclays Global Investors, San Francisco; and PowerShares Capital Management, Wheaton, Ill. Dividend-paying stocks got a big boost from President George W. Bush's 2003 tax-law change that cut taxes on dividends to 15% from ordinary income-tax rates.