WisdomTree Research

WAITING FOR DIVIDENDS VS. WEIGHTING BY DIVIDENDS Investors are increasingly turning to dividend equities because of the income they can generate, the stability they can offer—and much more. So it is unsurprising that one of the most popular themes in any equity market is that of dividend growth. And today there are a growing number of exchange-traded funds (ETFs) that provide access to this theme. However, although dividends have hit record levels, the key drivers of dividend growth in the U.S. are changing.1 So, as the selection of dividend growth ETFs widens, especially in U.S. large caps, we believe it is critical to understand the differences between the indexes that they track and the methodologies they use. Because all ETFs are not created equally. A BROAD FIELD DOMINATED BY ONE LARGE FUND Across the U.S. dividend growth ETF landscape, one fund currently stands above all the others in terms of assets. The Vanguard Dividend Appreciation ETF (VIG), which tracks the NASDAQ US Dividend Achievers Select Index, is the largest dividend growth ETF based on assets of $21.2 billion as of December 31, 2014.2 This Fund takes a popular approach of screening for a certain number of years of historical dividend growth. Obviously, to compete effectively against VIG, a fund must be compelling. So, let us compare VIG to a dividend growth fund that takes a more forward-looking approach—the WisdomTree U.S. Dividend Growth Fund (DGRW). This Fund, which tracks the performance of the WisdomTree U.S. Dividend Growth Index, took in $176.1 million during 2014 and stood at $283.7 million in assets at year-end.

Sources: WisdomTree, Bloomberg. Refers to the universe of the WisdomTree Dividend Index for the period 11/30/07 to 11/30/14. Source: Bloomberg.

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DIVIDEND GROWERS OF TODAY (AND TOMORROW) VS. DIVIDEND GROWERS OF YESTERDAY One of the most critical differences between the WisdomTree U.S. Dividend Growth Index (tracked by DGRW) and the NASDAQ US Dividend Achievers Select Index (tracked by VIG) is that the latter requires 10 consecutive years of dividend growth in order to qualify for inclusion, while the former does not. Why does this matter? Because we believe that dividend indexes with backward-looking growth screens may fail to capture growth opportunities—and we believe that performance will bear this out. The index methodologies are outlined below, but a simple example of the difference is the case of Apple. As one of the largest dividend payers in the United States, Apple is included in DGRW—but it won’t be eligible for inclusion in the VIG Index until 2023.3 Additionally, it is worth noting that not only does WisdomTree require a dividend, it also uses numerous quality screens and weights by dividends. NASDAQ and VIG, however, do not. The approaches between these two funds are unique. Let’s see if the performance is also. INDEX METHODOLOGY SUMMARY WisdomTree U.S. Dividend Growth (Performance Tracked By DGRW)

NASDAQ US Dividend Achievers Select (Performance Tracked By VIG)

Screening Eligibility Constituents must demonstrate at least 10 consecutive years of increasing annual regular dividend payments. + Constituents must exhibit dividend yields that are less than their earnings yields over the year prior to the screening date. Average daily cash volume must exceed $500,000 per day in + Market capitalization must be greater than $2 billion. November and December. + Regular cash dividend payer on common shares over the prior 12 months. Selection

Screening Process + Growth: 50% of the screening criteria is long-term earnings growth estimates. + Quality: 50% of the screening criteria is split evenly between three-year average return on equity and three-year average return on assets. The top 300 constituents by these criteria comprise the Index. There is no focus on historical dividend growth.

Weighting

Constituents are weighted by Dividend Stream®, which looks at indicated dividends per share multiplied by the number of shares outstanding.

Constituents are weighted by modified market capitalization (maximum 4%).

Sources: WisdomTree, NASDAQ.

Based on the Dividend Stream, which is the indicated dividend per share multiplied by the number of shares outstanding, measured once per year on November 30th. Relative to other payers of regular cash dividends in the United States ranked by this measure, Apple is in the top five.

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Although less than two years old, already DGRW’s performance suggests that its forward-looking approach can capture growth opportunities that may be missed by VIG. AVERAGE ANNUAL RETURNS [ As of December 31, 2014 ] Fund Information

WisdomTree U.S. Dividend Growth Fund Vanguard Dividend Appreciation ETF

Total Return (NAV)

Market Price

Ticker

Exp. Ratio

Inception Date

1-Year

3-Year

5-Year

Since Fund Inception

1-Year

3-Year

5-Year

Since Fund Inception

DGRW

0.28%

5/22/2013

13.54%

N/A

N/A

16.84%

13.73%

N/A

N/A

16.88%

VIG

0.10%

4/21/2006

10.06%

16.58%

14.05%

7.95%

10.06%

16.58%

14.05%

7.95%

10.12%

16.66%

14.16%

13.39%

10.12%

16.66%

14.16%

13.39%

NASDAQ U.S. Dividend Achievers Select Index

As of 12/31/14 Average Annual Returns of the WisdomTree U.S. Dividend Growth Index: 1-Year.: 13.81%, 3-Year.: N/A, 5-Year.: N/A, Since Inception: 18.89%. Performance is historical and does not guarantee future results. Current performance may be lower or higher than quoted. Investment returns and principal value of an investment will fluctuate so that an investors shares, when redeemed, may be worth more or less than their original cost. Performance data for the most recent month-end is available at www.wisdomtree.com. WisdomTree shares are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Total returns are calculated using the daily 4:00 p.m. EST net asset value (NAV). Market price returns reflect the midpoint of the bid/ask spread as of the close of trading on the exchange where Fund shares are listed. Market price returns do not represent the returns you would receive if you traded shares at other times. You cannot invest directly in an index. Index performance does not represent actual fund or portfolio performance. A fund or portfolio may differ significantly from the securities included in the index. Index performance assumes reinvestment of dividends but does not reflect any management fees, transaction costs or other expenses that would be incurred by a portfolio or fund, or brokerage commissions on transactions in fund shares. Such fees, expenses and commissions could reduce returns.

FIGURE 1: CUMULATIVE PERFORMANCE SINCE DGRW’S INCEPTION [ 5/22/13–12/31/14 ] 35% 30%

Cumulative Return

25%

DGRW VIG NASDAQ US Dividend Achievers Select

28.5% 21.3% 21.2%

20% 15% 10% 5% 0% -5%

5/ 22 /2 01 3 6/ 30 /2 01 3 7/ 31 /2 01 3 8/ 31 /2 01 3 9/ 30 /2 01 3 10 /3 1/ 20 13 11 /3 0/ 20 13 12 /3 1/ 20 13 1/ 31 /2 01 4 2/ 28 /2 01 4 3/ 31 /2 01 4 4/ 30 /2 01 4 5/ 31 /2 01 4 6/ 30 /2 01 4 7/ 31 /2 01 4 8/ 31 /2 01 4 9/ 30 /2 01 4 10 /3 1/ 20 14 11 /3 0/ 20 14 12 /3 1/ 20 14

-10%

Sources: Bloomberg, Zephyr StyleADVISOR. Performance for funds measured at net asset value. The NASDAQ US Dividend Achievers Select Index is the market capitalization-weighted benchmark for DGRW. Past performance is not indicative of future results. The majority of each fund’s total return for the periods shown was due to the market appreciation of the funds’ holdings, not to dividend income received or paid out by the funds.

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Now, let’s take a bit of a deeper look at the other differences between these two Funds and Indexes. SCREENING FOR GROWTH OR EXCLUDING IT? As we mentioned previously, the NASDAQ US Dividend Achievers Select Index, the Index VIG tracks, won’t be able to include Apple until 2023. In fact, because of its strict historical growth requirements, this Index excludes many of the largest dividend payers of recent years.4 A full 60% of the top dividend payers from DGRW are excluded from VIG—and will be for a long time. Additionally, if any of these dividend payers fail to grow their dividends for even one year, even if they are still paying dividends, the clock will reset and it will take another 10 years for them to become eligible. CAPTURING RECENT DIVIDEND GROWTH TRENDS By excluding dividend payers without a 10-year history of growth, VIG misses out on not only some of the largest dividend payers, but also recent dividend growth trends. Consider that dividends are traditionally known for coming from “defensive sectors” like Consumer Staples, Health Care, Utilities and Telecommunications Services. But these aren’t necessarily the sectors driving dividend growth today. As a result: + VIG Misses out on Information Technology: In looking at Figure 2 on the next page, we see that of the seven companies not included within VIG, three of them (Apple, Microsoft and Intel) are in the Information Technology sector— currently one of the largest dividend-paying sectors. Overall, DGRW has 8.9% greater exposure to Information Technology than VIG. We think this is part of the reason that DGRW did a better job keeping up with the S&P 500 in 2014. During 2014, the first full year for DGRW, the S&P 500 Index returned 13.7%, DGRW returned 13.5% and VIG returned 10.1%.5 While both funds underperformed the S&P 500, DGRW did much better at keeping pace due to its inclusion of Apple, Microsoft and Intel—three firms that were among the leaders in contributing to the S&P 500’s overall total return.6 + DGRW Is More Broadly Inclusive: As of December 31, 2014, DGRW had 300 constituents, nearly twice as many as VIG. Without requiring a prior history of dividend growth, DGRW’s underlying Index is able to include potential dividend growers quickly, regardless of their policies of past dividends.

10 largest dividend payers is based on the cash Dividend Streams of companies within the WisdomTree Dividend Index as of 11/30/14. Returns for DGRW and VIG measured at net asset value. Source: Bloomberg, Zephyr StyleADVISOR. 6 It should not be assumed that the majority of total return from dividend-paying stocks has or will come from dividends. For example, an investment in Apple common stock for year 2104 returned 2% from dividends and 37.7% in market appreciation (assuming dividends were taken in cash). 4 5

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FIGURE 2: VIG INCLUDES ONLY 3 OF DGRW’S TOP 10 CONSTITUENTS Year of Potential Eligibility for 10 Consecutive Years of Dividend Growth

Included in NASDAQ US Dividend Achievers Select Index?

Top 10 Constituents of DGRW

Sector

DGRW Weight

10 Years of Regular Dividend Growth?

Exxon Mobil Corp

Energy

5.6%

Yes

Apple Inc

Information Technology

3.9%

No

Microsoft Corp

Information Technology

3.8%

Yes

Altria Group Inc

Consumer Staples

2.9%

No

PepsiCo Inc

Consumer Staples

2.7%

Yes

Intel Corp

Information Technology

2.4%

No

McDonald's Corp

Consumer Discretionary

2.4%

Yes

No

International Business Machines Corp

Information Technology

2.3%

Yes

Yes

Health Care

2.2%

No

2023

No

Consumer Discretionary

1.9%

No

2019

No

AbbVie Inc Home Depot Inc/The

Yes 2023

No No

2019

No Yes

2024

No

Source: Bloomberg, with data as of 12/31/14. Current holdings for DGRW are available at wisdomtree.com. Holdings are subject to change. Dividends are not guaranteed, and a company’s future ability to pay dividends may be limited. A company currently paying dividends may cease paying dividends at any time. There are risks associated with investing, including possible loss of principal. Funds focusing their investments on certain sectors increase their vulnerability to any single economic or regulatory development. This may result in greater share price volatility. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile.

FIGURE 3: METHODOLOGY RESULTS IN SIGNIFICANT DIFFERENCE IN SECTORS [ as of 12/31/2014 ] Sector Name

WisdomTree U.S. Dividend Growth Fund (DGRW)

Vanguard Dividend Appreciation ETF (VIG)

Consumer Discretionary

19.8%

9.9%

Information Technology

19.7%

10.8%

Industrials

18.2%

21.4%

Consumer Staples

13.1%

22.6%

Health Care

10.6%

11.2%

Energy

7.6%

7.6%

Materials

6.4%

8.6%

Financials

4.4%

7.0%

Utilities

0.1%

0.8%

Sources: WisdomTree, Bloomberg as of 12/31/14. Holdings are subject to change.

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A FOCUS ON QUALITY, ROE LED TO HIGHER DIVIDEND GROWTH As mentioned previously, DGRW looks at quality characteristics in addition to dividends. In fact, return on equity (ROE), return on assets (ROA) and earnings growth are key drivers of the stock selection in DGRW. According to finance theory and the dividend discount model, return on equity is intimately related to dividend growth—so in theory, the higher the ROE, the higher the sustainable dividend growth of that company. DGRW is where this theory meets reality. As of December 31, 2014, the stocks in DGRW have historically been growing their dividends faster than those in VIG over the last 1, 3, and 5-years—so backward-looking growth screens may not truly indicate future growth potential. FIGURE 4: MEDIAN DIVIDEND GROWTH OF CONSTITUENTS

Average Annual Median Dividend Growth

18.0%

WisdomTree U.S. Dividend Growth Fund (DGRW) Vanguard Dividend Appreciation ETF (VIG)

16.0% 14.0%

16.0%

15.2%

14.5%

12.0% 10.0%

10.7%

10.6%

10.5%

8.0% 6.0% 4.0% 2.0% 0.0% 1-Year

3-Year

5-Year

Sources: WisdomTree, Bloomberg, as of 12/31/14. The dividend income received by DGRW and VIG may differ substantially from the median dividend growth rates shown in the chart because each fund weights its constituents, and because each fund’s constituents have changed over time. The chart should not be viewed as a measure of dividend income or dividend growth rates experienced by the funds in the past or to be expected in the future.

FOCUSED ON QUALITY CHARACTERISTICS The focus on quality we’ve been discussing has translated into a portfolio of higher-quality characteristics. Consider that the current dividend payers in DGRW have led to a portfolio with: + Higher Earnings Growth Expectations: The median long-term7 earnings growth estimates were approximately 1% higher for DGRW than for VIG.8 + Higher-Quality Factors: The median of the three-year average ROE and ROA for DGRW, seen at 19.18% and 8.39%, respectively, is also higher than the median of the three-year average ROE and ROA of VIG, seen at 16.54% and 7.31%, respectively.9 Refers to three to five years in duration. Source: Bloomberg, with data as of 12/31/14. 9 Source: Bloomberg, with data as of 12/31/14. 7 8

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CONCLUSION Like the majority of dividend growth ETFs currently on the market, VIG uses a backward-looking growth screen. But we believe that backward-looking ETFs can keep the companies growing their dividends the fastest out of your portfolio. In fact, dividend funds that employ backward-looking growth screens may not be able to take advantage of the technology firms and other firms driving today’s dividend growth trends for years to come. The WisdomTree U.S. Dividend Growth Fund, on the other hand, uses a forward-looking methodology that has enabled it to: + Outperform VIG since DGRW’s inception + Provide a broad portfolio of the most recent highest—and fastest-growing—dividend payers + Deliver higher-quality characteristics and more While no approach can ever know which firms will increase their future dividends, we believe that being broad, flexible and forward-looking will enable DGRW to more quickly respond to—and better capitalize on—the changing U.S. dividend landscape. In turn, we believe this will provide investors with a portfolio of the companies growing their dividends the fastest today—and tomorrow. At WisdomTree, we do things differently. We build our ETFs with proprietary methodologies, smart structures and/or uncommon access to provide investors with the potential for income, performance, diversification and more. For more information on DGRW or any of WisdomTree’s family of dividend growth Funds, contact your WisdomTree representative or call 866.909.WISE (9473).

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RISKS: There are risks associated with investing, including possible loss of principal. Funds focusing their investments on certain sectors increase their vulnerability to any single economic or regulatory development. This may result in greater share price volatility. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile. WisdomTree U.S. Dividend Growth ETF (NAV) (DGRW): The investment seeks to track the price and yield performance, before fees and expenses, of the WisdomTree U.S. Dividend Growth Index (“Index”). The Fund generally uses a representative sampling strategy to achieve its investment objective, meaning it generally will invest in a sample of the securities in the Index whose risk, return and other characteristics resemble the risk, return and other characteristics of the Index as a whole. Under normal circumstances, at least 80% of the Fund’s total assets (exclusive of collateral held from securities lending) will be invested in the component securities of the Index and investments that have economic characteristics that are substantially identical to the economic characteristics of such component securities. The Fund is nondiversified. WisdomTree U.S. Dividend Growth Index (WTDGI): The Index is a fundamentally-weighted, total return index that consists of dividend-paying U.S. common stocks with growth characteristics. It is comprised of the 300 companies in the WisdomTree Dividend Index with a market capitalization of at least $2 billion and the best combined rank of growth and quality factors. The growth factor ranking is based on long-term earnings growth expectations while the quality factor ranking is based on three-year historical averages for return on equity and return on assets. The Index is dividend weighted annually to reflect the proportionate share of the aggregate cash dividends each component company is projected to pay in the coming year. The maximum weight of any security in the Index generally is capped at 5%. Eligibility for inclusion in the WisdomTree Dividend Index include --among other criteria --incorporation in the U.S.; listing on the NYSE or NASDAQ; payment of regular cash dividends on shares of common stock in the 12 months preceding the annual screening date, which takes place in December; and average daily dollar volume of at least $100,000 for three months preceding the index screening date. To obtain a prospectus for WisdomTree Funds containing this and other important information, please call 866.909.WISE (9473) or go to www. wisdomtree.com. Investors should read the prospectus carefully before investing. WisdomTree Funds are distributed by Foreside Fund Services, LLC. Vanguard Dividend Appreciation ETF (VIG): The investment seeks to track the performance of a benchmark index that measures the investment return of common stocks of companies that have a record of increasing dividends over time. The fund employs an indexing investment approach designed to track the performance of the NASDAQ US Dividend Achievers Select Index, which consists of common stocks of companies that have a record of increasing dividends over time. It attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index. Under normal circumstances, the fund will invest at least 80% of its assets in the stocks that make up its target index. However, the fund may purchase stocks that have relatively low dividend yields if the company issuing the stock has increased dividends in recent years. The companies in which the Fund invests will be within the capitalization range of the companies included in the index ($1.9 billion to $35.2 billion as of 1/31/2014). NASDAQ US Dividend Achievers Select Index (DVGTR): The index is comprised of a select group of securities with at least ten consecutive years of increasing annual regular dividend payments. To be eligible for inclusion in the index a security must be included in the NASDAQ US Broad Dividend Achievers Index (DAA); must be traded on the NYSE or NASDAQ; and its average daily cash volume in November and December must exceed $500,000 per day. Limited partnerships and REITs are excluded. Additional proprietary eligibility may be applied. Constituents are weighted by modified market capitalization. The index is reconstituted and rebalanced annually in March, with the maximum weight of any security capped at 4%. Two versions of the Index are calculated - a price return index (DVG) and a total return index (DVGTR). Vanguard Dividend Appreciation ETF is distributed by Vanguard Marketing Corporation. To obtain a prospectus for VIG, please visit www.vanguard. com. Foreside Fund Services, LLC is not affiliated with Vanguard Marketing Corporation. © 2015 WisdomTree Investments, Inc. “WisdomTree” is a registered mark of WisdomTree Investments, Inc. FOR REGISTERED REPRESENTATIVE OR INSTITUTIONAL USE ONLY. NOT FOR PUBLIC USE OR VIEWING.

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