BY BEN STEVERMAN, Investor's Business Daily

Like soft drink flavors or potato chip varieties multiplying on supermarket shelves, new products are inundating the world of exchange traded funds.

Slicing up the markets using nearly every imaginable investment strategy, hundreds of new funds hope to capture the unprecedented flow of money into ETFs.

WisdomTree Investments, which launched all 30 of its funds since June, believes it has the right recipe.

Based on work by Jeremy Siegel, an influential professor at the Wharton School of Business, WisdomTree assigns weights to its indexed stocks according to their payout of dividends rather than market capitalization.

Though WisdomTree offers a plethora of index funds — large, mid and small cap, international and domestic — all stocks included in the funds must pay a dividend.

"There is a certain amount of maturity and stability to these companies," said Luciano Siracusano, WisdomTree's director of research. WisdomTree funds embrace companies that produce real earnings for shareholders; they shun "overvalued" companies that can end up dominating indexes based on market cap.

The result, according to WisdomTree and Siegel's research, is an index that can provide "lower volatility and the potential for higher returns," Siracusano said.

WisdomTree Chief Executive Jonathan Steinberg, who used to publish Individual Investor magazine, hired Siegel as a senior adviser. Former Securities and Exchange Commission Chairman Arthur Levitt is also a senior adviser and hedge fund king Michael Steinhardt provided financing for the firm, which used to be called Index Development Partners.

WisdomTree is part of fast growth in the ETF world. "The absolute number of choices in that universe is growing exponentially," said Bruce Zaro of Delta Global Advisors.

Worldwide ETFs

According to a report this month from Merrill Lynch, in the past year more than 250 ETFs were launched and assets under management increased 46%. There are now at least 665 ETFs on the market worldwide with assets of more than $525 billion, the report said.

Zaro sees WisdomTree as part of a trend away from simple indexes toward varying kinds of "active management."

"We're bound to have many more innovations down the road" like WisdomTree, he said.

Most of WisdomTree's funds have done well. For example, its Total Dividend Fund, which the firm compares with the Russell 3000 index, showed a cumulative return of 11.68% in its first 4 1/2 months.

In mid-November, WisdomTree passed $1 billion in assets under management, with the large-cap funds being the most popular, Siracusano says.

Investment advisers like Jerry Slusiewicz of Pacific Financial Planners recommend caution.

"While some of (WisdomTree's) funds have outperformed, it doesn't have a long enough track record," Slusiewicz said. The company had "fortuitous timing," launching just as the market was at a low point for the year, he said.

WisdomTree feels confident it has created "a better way to index," Siracusano said. According to Siegel's theory, focusing on dividends helps filter out "noise" — the temporary factors that can hide a company's true value from the market.

The company cites the results of back testing its approach. Most WisdomTree funds would have outperformed other indexes from 1980 to 2005, and over the last one-, five- and 10-year periods.

Once a year, the indexes are re-balanced according to dividend payout.

Dividends

By excluding stocks that don't earn dividends, the funds also exclude many fast-growing companies, especially in the technology sector. But Siracusano said the funds still offer "very broad market exposure," representing 75% to 80% of the market.

The WisdomTree approach seems to be "in style" now, but that could change in a couple of years, Slusiewicz says.

"Their concept is very good," Zaro said, but the WisdomTree funds are just one of a mix of approaches most investors will use over time. Dividend-earning stocks benefit from recent tax cuts, but tax policy could change again, he says.

One concern, Zaro says, is that the trading volume of some WisdomTree ETFs is very light. That's less of a concern for ETFs than for stocks, but it could cause problems for large investors.

The firm especially touts its international funds, many launched just last month. The funds slice up international stock markets in innovative ways, the company says. Different funds focus on Europe, Japan and the Pacific excluding Japan, and several international small-cap indexes are offered.

"We're always going to be innovating," Siracusano said, though he couldn't say what new products WisdomTree might introduce in the future.

The expense ratios for WisdomTree funds range from 0.28%- 0.38% for domestic ETFs to 0.48%-0.58% for its international funds, which Slusiewicz says are appropriately "in line."