Q: How would you describe your investment philosophy? Why should investors consider the WisdomTree ETFs?

A: Well-followed stock market indexes are capitalization- weighted, in other words, companies with larger market caps influence the index more than smaller companies regardless of their investment fundamentals and ability to generate return on capital. To reflect the fundamental nature of business we create a separate group of indexes that are fundamentally weighted and not capitalization-weighted. We are the first company to create these indexes and manage ETFs based on these indexes.

Q: Would you highlight the main differences between ETFs and mutual funds?

A: The most important difference, especially for individual investors, is that an ETF trades during the entire trading day and you can buy it and sell it anytime like another stock. Because it trades on an exchange, you don’t have to wait until the market closes to determine the value of the underlying securities. That means greater liquidity than a mutual fund or an index mutual fund would provide. There is also greater transparency because you can see the holdings, while mutual funds report their holdings at the end of every quarter.

Another difference is the tax efficiency because mutual funds are more vulnerable to capital gains distribution, especially internationally. I think that the investors who consider international mutual funds should ask how much they will lose each year to capital gains distributions.

Q: What are the major differences between fundamentally weighted indexes and capitalization weighted indexes? Why have you chosen the fundamental approach?

A: The difference between the two is that we base the initial weight on fundamental measures of value. So we disregard the value that the market puts on the company, and we weight the indexes based on fundamentals, which are the dividends that the company pays or, in the case of our earnings funds, the earnings companies generated in the previous year.

We created the fundamentally weighted indexes because we believe that the capitalizationweighted indexes have a tendency to overweight the overvalued stock, sectors, and regions. According to our historical research, fundamentally weighted indexes have generated better returns and with less volatility than the comparable capweighted indexes.

Because of the return and the volatility, we believe that our indexes have the potential to better serve investors. After all, it is the return and the risk you take for the capital that matter. So we believe that the fundamentally weighted indexes provide a definite improvement over the traditional cap-weighted indexes. By capturing the income generating potential of the company directly, we believe we can reduce the volatility and increase the returns.

Q: What type of earnings do you use for the earnings-weighted indexes?

A: We use the earnings data collected by the S&P, which adjust the extraordinary items and the nonrecurring events to define the core earnings generated by a company. We license the core earnings database from S&P and we weight the companies once a year based on those numbers.

Q: Do the Wisdom Tree ETFs focus on domestic companies or they include international companies as well?

A: We have 12 domestic indexes – six of them are weighted by dividends and six of them are weighted by earnings. These indexes cover companies incorporated in the United States that trade on domestic exchanges.

Internationally, we have 25 dividend-weighted indexes, and all of them cover developed markets outside of the U.S. and Canada. These indexes don’t invest in the emerging markets; we cover the same developed countries as MSCI EAFE Indexes. So we have ETFs in Europe, Japan, and the Pacific Region. (Note: WisdomTree launched and an emerging markets ETF on July 13, 2007).

So we have a very broad index in the same 21 equity markets as MSCI. But the different weighting approach results in different country exposures from the MSCI index. For example, we have greater exposure to the United Kingdom and Australia and we’re underweight in Japan because Japan pays out smaller dividends.

Q: When you approach the international market, do you rely on the same earnings and dividend formulas as in the U.S., or you would account for international accounting practices?

A: I would like to point out that the earnings family is very distinct from the dividend family and there is no merger of the data. All of the 25 international indexes are weighted by dividends; we don’t use the earnings at all for the international ETFs. In that way, we base our weights on the dollar value of the dividends paid in the prior year.

That approach pretty much solves the accounting problem that you pointed out. When dealing with diverse countries and regions, cash dividends represent secure common ground. Since the dividend is paid in local currency, we calculate the dividend into dollars to avoid currency fluctuations in the different countries. But, overall, we don’t buy the international capitalization or earnings stream; we buy the dividend stream.

Q: Let’s discuss the domestic earning-weighted indexes. Why do they tend to be less volatile and to provide higher returns than the capitalization-weighted indexes?

A: The Russell 3000 Index, which is a broad measure of the U.S. market, includes about 600 companies that haven’t been profitable in the previous year. For this reason our broad index, the WisdomTree Earnings Index, includes 2400 securities, not 3000. So we start with a universe of profitable companies and that helps to reduce volatility.