WisdomTree Europe

EUROPE SMALLCAP DIVIDEND UCITS ETF

DFE

Dial Up Economic Sensitivity With

European Small-Cap Stocks
At WisdomTree, we believe that small caps can be an interesting complement to many regional equity
allocationsa phenomenon that is especially true for Europe today. Consider that small caps:
+ Can lead the way during economic recoveries and shifts in sentiment
+ Are often in the cyclical sectors that are more sensitive to inflection points in economic growth
+ May provide significant long-term performance potential
The WisdomTree Europe SmallCap Dividend Index is a dividend-weighted index providing exposure to the
highest-yielding small companies in Europe. As the European policy picture continues to evolve, we believe that
small-cap stocks could respond if people begin to believe that a European recovery is on the horizon.
MANAGING RISK IN SMALL CAP STOCKS
Small cap stocks can capture the entrepreneurial spirit of a region and be very excitingbut they certainly are not
without risk. In some cases, these new businesses can have great stories and appear to have fascinating prospects.
Market participants can respond and bid up share prices due to their expectations of future growth, but the reality
is that in many cases these firms have yet to deliver on their promises of revenue or profits.
Focusing on pockets of valuation opportunity within small caps, which we show in figure 1, has tended to be one
avenue for potential outperformance:
+ A Nearly $10,000 Difference: Over the past period of nearly 25 years, the valuation sensitive approach to
European small caps led $1,000 to grow to over $12,000a return of nearly 11% per year. By contrast, the growth
approach (notably less sensitive to valuation concerns) delivered an average annual return of below 4% and
grew the original $1,000 to only about $2,400. In other words, this is a 400% difference on a cumulative basis.

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EUROPE SMALLCAP DIVIDEND UCITS ETF (DFE)

FIGURE 1: ITS PAID TO BE ATTENTIVE TO VALUATION [ 30/6/1990 to 30/9/2014 ]

$15,000

$12,222

Growth of $1000

Small Value
Small Growth

$2,446
$1,500

30
/9
/2
01
4

30
/6
/2
01
2

30
/6
/2
01
0

30
/6
/2
00
8

30
/6
/2
00
6

30
/6
/2
00
4

30
/6
/2
00
2

30
/6
/2
00
0

30
/6
/1
99
8

30
/6
/1
99
6

30
/6
/1
99
4

30
/6
/1
99
2

30
/6
/1
99
0

$150

Source: Kenneth French Data Library, with data as of 30/9/2014.

GAIN BIG EXPOSURE TO CYCLICAL SECTORS

Cyclical sectorsnotably those outside of Consumer Staples, Health Care, Telecommunication Services and
Utilitiestend to respond more readily to changes in economic growth expectations, such as increases in
consumption or capital spending. If the policy prescriptions from the European Central Bank begin to affect the
economic landscape, these firms have the potential to respond.
As figure 2 illustrates, the WisdomTree Europe SmallCap Dividend Index has a high (84%) exposure to cyclical
sectorswhich is far higher than the other indices measured.

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EUROPE SMALLCAP DIVIDEND UCITS ETF (DFE)

FIGURE 2: HIGH EXPOSURE TO CYCLICAL SECTORS

90%

83.7%

Economic Cyclicals
Economic Defensives

80%

Sector Exposure

70%

65.3%

64.2%

63.7%

60%
50%
40%

36.3%

34.7%

35.8%

30%
20%

16.3%

10%
0%
WisdomTree Europe
SmallCap Dividend

Stoxx Europe 600

MSCI Europe

FTSE Developed Europe

Sources: WisdomTree, Bloomberg, with data as of 30/9/2014.

WISDOMTREE WEIGHTS BY DIVIDENDS

The majority of ETFs are market cap weightedmeaning they give more weight to companies selling at higher
prices than those potentially offering stronger fundamentals. Research has shown that stock prices canand
dodeviate from their underlying value for many reasons. WisdomTree believes fundamentals like dividends
offer more objective measures of a companys health, value and profitability than stock price alone. Consider that:
+ Dividends have theoretical and empirical importance in determining stock values
+ Paying dividends indicates that management is focused on increasing shareholder value
+ Dividend stocks offer the potential for income, income growth and capital appreciation
+ Dividends can provide benefits regardless of the market direction
WisdomTree uses a unique dividend weighting methodology that can magnify the effect dividends have on
performance helping to provide higher income and growth potential to all investors.

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EUROPE SMALLCAP DIVIDEND UCITS ETF (DFE)

A RULES-BASED METHODOLOGY KEEPS FOCUS ON DIVIDENDS

European small-cap stocks are obviously an interesting asset class, but how you access them is critical. The
WisdomTree Europe SmallCap Dividend Index seeks to include a broad array of dividend-paying small caps353
as of 30 September 2014. Our methodology is designed to work on an ongoing basis, annually rebalancing
to maintain its focus on small companies that pay dividends. Its important to note that focusing on small-cap
European dividend payers doesnt lead to a narrow index.
FIGURE 3: METHODOLOGY MATTERSHOW THE WISDOMTREE EUROPE SMALLCAP DIVIDEND
INDEX MAINTAINS ITS FOCUS
Selection Rules
Eligible Universes

Component companies must be incorporated within and list their shares on an exchange within one of
the following countries: Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Netherlands,
Norway, Portugal, Spain, Sweden, Switzerland or the United Kingdom.

Market Cap Requirement

At least $100 million as of the annual screening date.

Liquidity Requirements

Average daily dollar volume of at least $100,000 for three months preceding the screening date. A further
volume screen requires that a calculated volume factor (average daily dollar volume for three months
preceding the screening date divided by weight of security in Index) shall be greater than $200 million.

Selection Methodology

All constituents in the WisdomTree Europe Dividend Index are ranked by market capitalisation, with the
300 largest firms then removed. After the removal of the 300 largest firms, the bottom 25% of the remaining
market capitalisation comprises the WisdomTree Europe SmallCap Dividend Index. To be deleted,
companies must fall outside of the bottom 30% by this same metric.

Weighting Rules

Weighting

Each company's weight is proportional to its cash dividend per share paid over the annual cycle prior to
the Index screening date multiplied by its shares outstanding, or Dividend Stream, relative to that all other
index constituents. Dividends are measured in terms of U.S. dollars, and a company must have paid at least
$5 million over the prior annual cycle to be eligible for inclusion.

Capping Rules

First, exposure to any country is capped at 25% as of the annual screening date. Second, exposure to any
sector is capped at 25%. Between annual Index screening dates, both country and sector weights may shift
above these caps due to market movement.

Liquidity Adjustment
Factor

If a security has a calculated volume factor less than $400 million, its weight will be reduced proportionally by
a liquidity factor that equals the original calculated volume factor divided by $400 million. Implementation
of this adjustment may cause an increase in sector or country weights above other specified caps.

Source: WisdomTree.

In our opinion, a rules-based process focused on weighting by dividends, rather than by price, can offer potential
outperformance, higher yields and lower risk than market capitalisation approaches, thus helping investors better
capitalise on the benefits small European companies offer.

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MANAGING VALUATION RISK THROUGH ANNUAL REBALANCING

Each June, the WisdomTree Europe SmallCap Dividend Index is rebalanced based on relative value to maintain a
focus on the small cap value premium. The constituents and weights can change depending upon:
+ Price Performance: As we know, share prices of constituent stocks can move significantly either up or down
over the course of a year. The rebalance can be thought of as somewhat of a great equalizer in that,
no matter what the share price has done, the focus shifts back to the cash dividends. If a companys share
price has, for instance, increased significantly, but dividends have not grown, then that company would be a
candidate for a reduction in Index weight.
+ Dividend Growth: The road to greater representation within this index is simple: Growing Dividends. The
methodology rewards firms that grow their dividends with greater representation within the Index. When
firms reduce their dividends, theyd typically see their weights reduced at the next annual rebalance.
It is important to note that when the Index is rebalanced, caps are set at 25% to sectors and countries in order to
mitigate the risk of overexposure to any one stock or sector.
We believe that focusing on small-cap dividend payers is a quantitative, disciplined way to access the value
premium, avoid speculative companies and locate yield opportunities, while also managing valuation risk. We also
believe that weighting by dividends rewards companies that are growing their dividends.
THE PROOF IS IN THE PERFORMANCE
Taking a look at the live performance history for the WisdomTree Europe SmallCap Dividend Index reveals that
it provides:
+ The Highest Returns: Measured against the other indices shown in figure 4, the WisdomTree Europe
SmallCap Dividend Index had the highest return over all the periods shown.
+ The Highest Sharpe Ratio: The WisdomTree Europe SmallCap Dividend Index had the highest Sharpe ratio
over each period shown. This statistic proves that the additional returns come without undue risk.
+ A Beta Below 1.00: A beta below 1.00 measured against the MSCI Europe Small Cap Indexespecially
combined with the lower standard deviationis another illustration of the potential for attractive riskadjusted returns.

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FIGURE 4: A POSITIVE LONG-TERM PERFORMANCE RECORD

Period

1-Year

3-Year

5-Year

1/6/06 to
30/9/14

Index

Avg. Ann. Return

Std. Dev.

Sharpe Ratio

Beta1

WisdomTree Europe SmallCap Dividend

18.08%

10.13%

1.78

0.99

STOXX Europe 200

10.12%

10.21%

0.99

1.07

MSCI Europe Small Cap

12.61%

9.42%

1.33

1.00

WisdomTree Europe SmallCap Dividend

24.94%

11.44%

2.18

0.94

STOXX Europe 200

18.45%

11.57%

1.59

0.99

MSCI Europe Small Cap

22.04%

11.53%

1.91

1.00

WisdomTree Europe SmallCap Dividend

15.42%

13.31%

1.15

0.92

STOXX Europe 200

11.62%

14.15%

0.82

0.99

MSCI Europe Small Cap

13.94%

14.07%

0.99

1.00

WisdomTree Europe SmallCap Dividend

5.79%

19.10%

0.24

0.97

STOXX Europe 200

5.26%

19.02%

0.21

0.97

MSCI Europe Small Cap

5.46%

19.38%

0.22

1.00

Sources: WisdomTree, Zephyr StyleADVISOR, with data as of 30/9/2014.

1
Beta: Measured against the MSCI Europe Small Cap Index.

WISDOMTREE EUROPE SMALLCAP DIVIDEND UCITS ETF AT A GLANCE:

London Stock Exchange Code: DFE
BBG Code: DFE LN
Reuters Code: DFE.L
ISIN: IE00BQZJC527
Listing Currency: GBx
Fund Base Currency: EUR
Financial Year End: 31 December
TER: 0.38%
Underlying Index: WisdomTree Europe SmallCap Dividend Index

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At WisdomTree, we do things differently. We launched our first ETFs in the United States in June of 2006
and in Europe in October of 2014. Globally, we are currently the industrys sixth largest ETP provider with
strategies spanning asset classes and countries around the world. A smart beta innovator, we pioneered
the concepts of fundamentally weighted and active ETFs and are currently an industry leader in both
categories. We build our UCITS ETFs with unique methodologies, smart structures or uncommon access to
provide investors with the potential for income, performance, diversification and more.

LEARN MORE ABOUT OUR APPROACH AND READ OUR RESEARCH AT WISDOMTREE.COM

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