Home etftrends.com A Look at What’s Driving the Outperformance of Our Quality Growth ETF

A Look at What’s Driving the Outperformance of Our Quality Growth ETF

By Hyun Kang, Research Analyst, and Matt Wagner, CFA, Associate Director, Research

Key Takeaways

  • The WisdomTree U.S. Quality Growth Index has outperformed the Nasdaq 100 Index and the Russell 1000 Growth Index across various periods, indicating its success in capturing growth and targeting high-growth, high-profitability companies.
  • The WisdomTree U.S. Quality Growth Index selects 100 U.S. companies with the highest scores in quality and profitability metrics, and its semiannual rebalance in June saw the addition of pharmaceutical giant Eli Lilly and Company, further enhancing its growth-focused composition.
  • The WisdomTree U.S. Quality Growth Index has seen the most outperformance in the Information Technology sector through stock selection. It benefits from its allocation to all sectors except Utilities and Financials, making it a more pure-play exposure to growth.

The Nasdaq 100 Index is considered by many as the default benchmark for growth.

The methodology is straightforward—the 100 largest non-financial companies by market cap listed on the Nasdaq Exchange. Securities are weighted by modified market capitalization.

One of the drawbacks to this simplicity for a growth benchmark is that mature, slow-growth companies can populate the Index because of the absence of fundamental selection criteria.

In our view, WisdomTree has created a better way to capture growth—the WisdomTree U.S. Quality Growth Index. Since its launch near the end of 2022, it has outperformed the Nasdaq 100 while being more directly targeted to high-growth, high-profitability companies.

WisdomTree U.S. Quality Growth Index vs. Benchmarks since Inception

Sources: WisdomTree, Nasdaq, S&P, Russell. Returns from 11/30/22. You cannot invest directly in an index. Past performance is not
indicative of future returns.

The Wisdom U.S. Quality Growth Fund (QGRW), which tracks the performance of the WisdomTree U.S. Quality Growth Index, has outperformed its peers in the Morningstar Large Growth Category across various periods by an even wider margin than its performance relative to traditional growth benchmarks.

WisdomTree U.S. Quality Growth Fund Performance

Sources: WisdomTree, Nasdaq, Russell, Morningstar, as of 5/31/24. You cannot invest directly in an index. Performance data quoted represents past performance and is no guarantee of future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted.

For QGRW’s full standardized and most recent month-end performance, please click here.

The WisdomTree U.S. Quality Growth Index underwent its semiannual rebalance this June. During each rebalance, the Index selects the 100 U.S. companies with the highest scores in quality and profitability metrics.

This rebalance saw the addition of pharmaceutical giant Eli Lilly and Company, whose common stock is up 46% this year, at 3.45%.

Eli Lilly has an approximately 2.6% weight in the Russell 1000 Growth Index, but the security is excluded from the Nasdaq 100 Index as its primary listing is on the NYSE, not the Nasdaq.

This is despite the premium sales growth of the company from its wildly successful Mounjaro weight loss drug.

Top 10 Holdings, WisdomTree U.S. Quality Growth Index

Sources: WisdomTree, FactSet, as of 5/31/24. You cannot invest directly in an index.

The WisdomTree U.S. Quality Growth Index has outperformed the Russell 1000 Growth Index since its inception in November 2022 by more than 8.5%.

The bulk of this outperformance can be attributed to high-growth sectors like Information Technology and Communication Services.

Within the Information Technology sector, the Index saw the most outperformance through stock selection—a direct consequence of its screening process and methodology.

In addition to Information Technology and Communication Services, the Index benefited from its allocations to all other sectors except for Utilities and Financials.

Sector Attribution

Sources: WisdomTree, FactSet, Russell, as of 5/31/24. Attribution shows the contribution to outperformance by sector for the WisdomTree U.S. Quality Growth Index relative to the Russell 1000 Growth Index. You cannot invest directly in an index. Past performance is not indicative of future returns.

Like the Nasdaq 100, the WisdomTree Index selects 100 securities. The Indexes hold 37 securities in common with a common holdings score (or overlap) of 63%.

If we look at the chart below, we can see the difference in trailing earnings growth of constituents held in QGRW that are not held in the Nasdaq 100 and vice versa.

The main takeaway: Because the Nasdaq 100 has no fundamental selection criteria, it sacrifices on its growth criteria by including some slower-growth securities that happen to pass its market-cap and listing requirements.

For investors considering a more pure-play exposure to growth while also including a profitability bet, consider the Wisdom U.S. Quality Growth Fund (QGRW).

WisdomTree U.S. Quality Growth Fund (QGRW) vs. Nasdaq 100 Overlap

Median Trailing Five-Year Sales Growth

Sources: WisdomTree, Nasdaq, FactSet, as of 5/31/24. You cannot invest directly in an index.

Conclusion: How Long Will the Seven Stay Magnificent?

The “Magnificent Seven” group of stocks, led by its poster child NVIDIA (NVDA)—which recently surpassed the combined market cap of the entire German stock market—is still mostly going strong after a breakout performance in 2023. Putting aside a floundering Tesla (TSLA) for now (down 25% year-to-date), the million-dollar question is: how long will this last?

The WisdomTree U.S. Quality Growth Index has a rules-based methodology that reconstitutes on a semiannual basis each June and December. The design of the Index is to not bet on individual names or a basket of several names over the long run but to represent a relatively high-conviction allocation to 100 companies with high profitability and growth characteristics.

Fundamentals

Sources: WisdomTree, Russell, S&P, FactSet, as of 5/31/24. You cannot invest directly in an index. Past performance is not indicative of future results.

This article originally appeared on WisdomTree’s website and is reprinted on VettaFi | ETF Trends with permission from the author. For more information, please visit WisdomTree.com.


Important Risks Related to this Article

There are risks associated with investing, including the possible loss of principal. Growth stocks, as a group, may be out of favor with the market and underperform value stocks or the overall equity market. Growth stocks are generally more sensitive to market movements than other types of stocks. The Fund is non-diversified; as a result, changes in the market value of a single security could cause greater fluctuations in the value of Fund shares than would occur in a diversified fund. The Fund invests in the securities included in, or representative of, its Index regardless of their investment merit. The Fund does not attempt to outperform its Index or take defensive positions in declining markets, and the Index may not perform as intended. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile.

U.S. investors only: Click here to obtain a WisdomTree ETF prospectus which contains investment objectives, risks, charges, expenses, and other information; read and consider carefully before investing.

There are risks involved with investing, including possible loss of principal. Foreign investing involves currency, political and economic risk. Funds focusing on a single country, sector and/or funds that emphasize investments in smaller companies may experience greater price volatility. Investments in emerging markets, currency, fixed income and alternative investments include additional risks. Please see prospectus for discussion of risks.

Past performance is not indicative of future results. This material contains the opinions of the author, which are subject to change, and should not to be considered or interpreted as a recommendation to participate in any particular trading strategy, or deemed to be an offer or sale of any investment product and it should not be relied on as such. There is no guarantee that any strategies discussed will work under all market conditions. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This material should not be relied upon as research or investment advice regarding any security in particular. The user of this information assumes the entire risk of any use made of the information provided herein. Neither WisdomTree nor its affiliates, nor Foreside Fund Services, LLC, or its affiliates provide tax or legal advice. Investors seeking tax or legal advice should consult their tax or legal advisor. Unless expressly stated otherwise the opinions, interpretations or findings expressed herein do not necessarily represent the views of WisdomTree or any of its affiliates.

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Jonathan Steinberg, Jeremy Schwartz, Rick Harper, Christopher Gannatti, Bradley Krom, Kevin Flanagan, Brendan Loftus, Joseph Tenaglia, Jeff Weniger, Matt Wagner, Alejandro Saltiel, Ryan Krystopowicz, Brian Manby, and Scott Welch are registered representatives of Foreside Fund Services, LLC.

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You cannot invest directly in an index.

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