Guide ThE ETF Investor Guide mutualfundinvestorguide.com SPECIAL REPORT: Matthew D. Sauer Founder & Chief The Best Equity ETF to Buy for 2015: Investment Offi cer WIsDoMTrEE MIDCap (Don)

Matthew Sauer is the Last year belonged to the large cap indexes. formation available on the company, and that as Founder and Chief While mid caps and small caps turned in de- soon as new information is available, it is imme- Investment Offi cer of cent returns, leadership belonged to the mega diately priced into the . can gain the Mutual Fund Investor cap that dominate the S&P 500 Index. no advantage by researching and trading stocks, Guide family of Mid cap stocks represented by the S&P Mid- and by the time an investor hears any news, the newsletters. Each month Cap 400 were still down for the year in Octo- stock has already factored it in. The best he analyzes and provides approach under these conditions is simply to buy buy, sell and hold ber before a late pulled them into positive territory. The story was similar for their small the market. Taken further, this approach leads to recommendations for the concept that capitalization-weighted portfo- hundreds of mutual funds cap brethren, which spent much of the year lios deliver the highest expected returns for an and ETFs in the Investor under water. expected level of risk while simultaneously pro- Guide to Fidelity Funds, In 2015, mid-cap stocks look more attractive, and viding the minimum risk for a desired return. The Investor Guide to Van- we think they stand a good shot at beating large result is an effi cient investment with known risk/ guard Funds, as well as caps this year. Instead of taking an aggressive ap- the ETF Investor Guide. return characteristics. Although this approach proach to mid caps, however, a value approach has a tremendous infl uence on investment pro- is more appropriate. Some sectors, such as en- fessionals, many fi nancial and academic experts Prior to founding the ergy and consumer discretionary, were hit hard disagree with the premise. They believe that the Mutual Fund Investor in 2014, and our pick for the Best ETF in 2015 is market is not always effi cient. Guide, Matt was the a fund that rotates out of overvalued companies President and Chief and into undervalued ones. Mid-caps should per- NOISY mARkET HYPOTHESIS Investment Offi cer of form better relative to large caps in 2015, and if This hypothesis says that there is “noise” in the the Fidelity Independent sectors such as consumer discretionary rebound markets and that they are not always effi cient. Adviser, ETF Report, from a poor 2014, WisdomTree MidCap Divi- Analysts believe other factors infl uence and ex- and Sector dend (DON) is positioned to benefi t. plain the broad movements in stock prices. The Tracker. Over the past 20 years, there has been a prolifer- Noisy Market Hypothesis is the one preferred by ation of exchange-traded funds (ETFs), and new WisdomTree because conventional wisdom has recognized that a can experience periods Matt Sauer earned his investment products are being introduced on a of irrational frenzies and bubbles. These events Juris Doctor from Albany regular basis. Different fi rms have different ap- Law School of Union proaches, with most funds falling into the cate- can cause its price to fl uctuate widely from its University in Albany, NY. gory of -weighted indexes perceived underlying fundamentals and fair Mr. Sauer is a licensed such as the S&P 500 Index. There are several value. Factors that infl uence traders include ru- attorney in the State of other approaches, though, ranging from the Rev- mors, incomplete information, emotion and the New York. He received his enueShares model that uses revenues to weight desire to trade based on past price movements. Master of Business holdings to WisdomTree’s dividend approach. Investors, traders and institutions also may sell shares based on reasons not related to the under- Administration, from the Market Capitalization-Weighted Approach State University of New lying valuation of the security or its issuing com- York at Albany and his The fi rst group of ETFs and the majority that pany. These factors include liquidity, fi duciary Bachelor of Arts in Political have followed create their portfolios based upon and tax reasons. Science and Economics market capitalization-weighted indexes. These If this hypothesis is correct, the price of stocks from Bucknell University. indexes are most favored by investors who be- is not a clear, unbiased estimate of the securi- lieve in the Effi cient Market Hypothesis, which ty’s true value. As these changes take place in states that a company’s price represents all in- the market, investors can be swept up into a 1 The Investor Guide to Fidelity Funds buying or selling frenzy. Emotions can a three-month average daily trading vol- managed funds in the value category. This lead to the expansion and collapse of ir- ume of more than $100,000. The fund is outperformance increases to 95 percent rational bubbles. A prime example is the then weighted based on an individual is- over the past five years. overvaluations created in market capital- sue’s share of the dividend stream, or on ization-weighted index funds during the the total sum of all regular cash WisdomTree MidCap late 1990s tech bubble. A Noisy Market paid by all shares within the index. Dividend Composition This Dividends of a Dividend Approach approach would have avoided this situa- Indexes are rebalanced annually based is used by WisdomTree to create its Mid- tion by reducing the importance of these on criteria that adjust the portfolio’s Cap Dividend ETF (DON). Established in stocks within the portfolio. In 1984, weighting based on the concept of rela- 2006, the ETF invests at least 95 percent famed investor Warren Buffet wrote that tive value. The portfolio is shifted from of assets under management in securities the market is inefficient because a “herd” stocks demonstrating lower rates of div- contained in the benchmark WisdomTree mentality can set prices on the . In idend growth to those that have shown a MidCap Dividend Index. Other invest- a Wall Street Journal op-ed piece in March higher rate. This means stocks that have ments may be included in the fund if they 2000, Jeremy Siegel provided an analysis risen in price but do not have an accom- have identical fundamental characteris- of the tech bubble that also revealed lim- panying increase in dividends will re- tics to those contained in the underlying itations of the market capitalization meth- ceive a lower weighting than stocks that benchmark index. The fundamentally odology to index investing. demonstrate the opposite fundamental weighted index comprises dividend-pay- characteristics. The approach runs counter WisdomTree’s Dividends ing securities issued by midsize capital- to what would happen in a market capital- of a Dividend Approach ized U.S. companies. ization-weighted fund, where stocks that If markets are inefficient, then a capital- have increased the most became a larger The WisdomTree MidCap Dividend ization-weighted approach may not share of the total index. Index is comprised of the top 75 percent the best risk/return performance. As a of stocks by market capitalization in the The reconstituted index is weighted more result, WisdomTree follows a fundamen- WisdomTree Dividend Index, after the heavily toward higher dividends and in- tally weighted index approach. The firm 300 largest companies have been re- creased dividend growth while being less believes this style of investing provides moved. The Index is dividend-weighted exposed to more volatile and speculative the opportunity to add returns while low- annually to reflect the proportionate share issues. This creates an index slanted to- ering risk. Portfolios are weighted based of the aggregate cash dividends each ward value, as growth stocks that pay on fundamental factors because this leads component company is projected to pay small or no dividends are not included to a concentration in undervalued stocks in the coming year, based on the most re- in the index. This value-versus-growth while minimizing exposure to those that cently declared dividend per share. This dichotomy explains a large part of the are considered overvalued. means that companies are weighted based difference between the performance of a This fundamental weighting is combined on how much money they spend on div- WisdomTree Index and that of a broadly with as the bench- idends, not on how much they yield. For focused market capitalization-weighted mark indexes are tied to less volatile example, a company that pays $500 mil- index. A dividend stream-weighted ap- measures such as dividends and other lion in dividends but has a 1 percent yield proach improves the trailing 12-month company fundamentals. Historically, is weighted more highly than a company and increases the amount dividends have played a key role in de- that pays $300 million in dividends but paid to investors seeking additional in- termining a stock’s value. They also have yields 2 percent. come, such as retirees. The Dividends provided a majority of re- of a Dividend methodology also protects turns over time. In addition to being an Portfolio and Holdings investors during market bubbles while objective measurement of a company’s The portfolio of this $1.33 billion ETF is producing the benefit of higher dividend financial (accountants can twist invested entirely in U.S. securities and has growth. It may also soften the severity of a balance sheet, but cash in the hands of an average market cap of slightly more a bear market downturn. stockholders is crystal clear), dividends than $6 billion. This compares to the mid- indicate how focused company leaders WisdomTree believes that indexing, com- cap value category’s average market cap are on increasing -term shareholder bined with ETFs, creates a highly efficient of $9.3 billion. According to Morningstar, value. To be included in a WisdomTree investment vehicle with a number of ad- the fund is overweight in the consumer dividend equity fund, a stock must pay ditional benefits, and the numbers largely cyclical and real estate sectors relative to a regular cash dividend and meet certain bear that out. Since its inception, the Wis- the category, and underweight in financial daily trading requirements. These include domTree Dividend Index has beaten ap- services and healthcare. The fund is also a market cap of at least $100 million and proximately 83 percent of the 793 actively light on energy relative to the category due to the deteriorating fundamentals in

2 PHONE: (888) 252-5372 SPECIAL REPORT SPECIAL REPORT: THE BEST EQUITY ETF FOR 2015 the sector. However, one of the top 10 as with all of WisdomTree’s funds. standard deviation of 9.17. While DVY holdings is Diamond Offshore Drilling has a good yield of 3.01 percent, it is too (DO), a stock that fell from above $50 per Runner-ups heavily weighted in utilities, which sig- share last year to as low as $30. The first runner-up for mid caps is Van- nificantly increases its market sector and guard Mid-Cap Exchange Traded Fund DON has an annual turnover of 32 per- interest rate risks. The fund is a decent fit (VO). This ETF seeks to replicate the re- cent. for investors who lack utilities exposure turn performance of its benchmark CRSP in their portfolio. The top 10 holdings comprise approx- U.S. Mid Cap Index, a broadly diversi- Another investment is the Gug- imately 10.5 percent of the fund’s total fied index of U.S. midsized companies. genheim Russell MidCap Equal Weight assets. In order of declining percentage The fund’s largest holdings are Vertex ETF (EWRM), which has a three-star rat- of net assets, the top holdings are Wind- Pharmaceuticals, Health Care REIT, and ing from Morningstar. The fund has $155 stream, American Realty Properties, Avago Technologies as well as United million in total assets. Its largest holdings Mattel, Diamond Offshore Drilling and Continental Holdings and Mylan Inc. on a percentage basis are Rite Aid, Con- CenterPoint Energy. The next five largest The one-, three- and five-year returns are stellation Brands, and Monster Beverage holdings are Frontier Communications, 13.28, 20.22 and 16.03 percent, respec- as well as Sprouts Farmers Market and Ameren, Coach, Maxim Integrated Prod- tively. These produce a category rank Molson Coors Brewing. The most recent ucts and SCANA Corp. of 15, 34 and 39. In addition to a performance indicators for this relatively of 0.97, VO has a standard deviation of Historical Performance new fund include one- and three-year total 10.48. Although this ETF has a lower and Risk returns of 9.14 and 18.87 percent, respec- yield than DON, this four-star Morning- tively. The ETF has a beta of 1.0 and a This five-star Morningstar-rated fund has star-rated fund is an excellent low-cost standard deviation of 10.92. The fund has a historical one-, three- and five-year re- option for investors who favor expenses category ranks of 42 and 58 for these same turn of 15.27, 20.74 and 17.63 percent, over income. VO yields only 1.29 percent. respectively. This performance compares periods. EWRM has a low trading volume to the 12.51, 20.20 and 15.93 percent re- Income investors should consider iShares that can make it difficult for investors to turns of the mid-cap value category and Select Dividend ETF (DVY), which has trade in and out of shares cost-effectively. the 13.54, 19.34 and 14.69 percent returns a three-star rating from Morningstar. The That said, its equal weight approach has of the S&P 500 Index over the same peri- fund seeks to track the performance re- proven successful when used by other ods. Over the past three years, DON has sults of the Dow Jones U.S. Select Div- funds, particularly in years when a sec- a standard deviation of 9.89 and beta of idend Index, a portfolio composed of tor that is overrepresented in market cap 0.97. This compares to the category rat- equities from U.S. companies that have weighted indexes underperforms. Since ings of 11.0 and 1.07, respectively. The paid relatively high dividends over time last year’s sector winners and losers were fund has an annual distribution yield of on a consistent basis. DVY has produced over- and underweighted in market cap 4.69 percent, while the 30-day SEC yield one-, three- and five-year total returns of weighted indexes, the equal-weight ap- is 2.74 percent. 15.76, 17.62 and 16.18 percent, respec- proach underperformed. EWRM has an tively. The fund’s ranks in its category expense ratio of 0.41 percent and a yield Fees, Expenses and over these same periods are 20, 91 and of 1.30 percent. Distribution 19. The largest holdings in this $15.52 DON has a net expense ratio of 0.38 billion fund include Lockheed Martin, percent, which is less than the category Entergy Corp, Integrys Energy, Philip average of 0.42 percent. Customers of Morris International and Kimberly-Clark. E*Trade can trade DON commission free, The ETF has a beta of 0.90 as well as a

If you have any questions or comments about these funds, we would be delighted to speak with you. Please call us at (888) 252-5372, Monday through Friday 8:30am to 5:30pm, eastern time. You can also email me at [email protected].

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www.MutualFundInvestorGuide.com 3 The Investor Guide to Fidelity Funds

WisdomTree Mid Cap Dividend (DON) Top 10 Holdings Symbol % Assets Windstream Holdings, Inc. WIN 1.42 American Realty Capital Propert ARCP 1.16 Mattel, Inc. MAT 1.12 Diamond Offshore Drilling, Inc. DO 1.10 Frontier Communications Corp Class B FTR 1.06 Ameren Corporation AEE 1.03 CenterPoint Energy, Inc CNP 1.02 Coach, Inc. Common Stock COH 0.92 Maxim Integrated Products, Inc. MXIM 0.80 SCANA Corp SCG 0.78

FUND CHARACTERISTICS YTD Return -1.25% 1 Year Average Annual Return 15.27% 3 Year Average Annual Return 20.74% 5 Year Average Annual Return 17.63% Morningstar Category Mid-Cap 30 Day SEC Yield 2.74% Turnover 32.00% Beta 0.97 Standard Deviation 9.89 NET Assets $1.338B Morningstar Overall Rating 5 Star Morningstar Risk Rating Below Average Expense Ratio 0.38% Holdings 409

ETF Investor Guide Investor Guide TO FIDELITY FUNDS Each month we provide buy, hold and sell recommenda- Each month we provide buy, hold and sell recommendations tions for hundreds of ETFs from companies including Fi- for hundreds of mutual funds from Fidelity and dozens of other delity, iShares, SPDR and PowerShares. Additionally, you companies. Additionally, you will also have access to our model will have access to our model portfolios, specifically cre- portfolios, specifically created for conservative, moderate and ated for conservative, moderate and aggressive investors. aggressive investors. To learn more, call (888) 252-5372. To Become a Member simply call me at Membership Options: (888) 252-5372. 1-Year Via 1st Class Mail & Online Access: $99.95...... LIMITED TIME $49.95 Disclosure: Mutual Fund Investor Guide, LLC (MFIG) is an independent company unaffiliated with any of the 2-Years Via 1st Class Mail & Online Access: fund companies discussed in this newsletter, including . These results include the reinvestment of all dividends and capital gains. Model trading does not involve financial risk; model trading cannot completely $149.95...... LIMITED TIME $74.95 duplicate the financial risk associated with actual trading. MFIG is not an investment advisor and does not provide specific investment advice. This newsletter has been prepared solely for informational purposes. PAST PERFOR- MANCE IS NOT A GUARANTEE OF FUTURE RESULTS. All investments involve risk including total loss of principal.

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