Quality stocks often come with a higher cost of admission, or elevated valuations, relative to lower quality fare. That’s the price investors pay to put this factor on their sides. However, the quality now looks attractively valued.
Advisors can access quality strategies with WisdomTree’s Core Equity Model Portfolio, which is part of the issuers broader suite of Modern Alpha model portfolios.
“This model portfolio is designed for growth-oriented investors with a long-term horizon looking to maximize long-term potential for capital growth through a globally diversified set of equity ETFs,” according to WisdomTree.
This model portfolio features 11 equity exchange traded funds, included domestic and international funds, several of which employ as part of their weighting methodologies.
“You might worry that rotation and flows to quality strategies push up valuations to premium prices, hurting the prospects of forward-looking returns,” said WisdomTree Research Director Jeremy Schwartz in a recent note. “But WisdomTree has a potential solution. We have a family of quality dividend growth strategies that combine elements of screening for profitability (high return on equity and return on assets) and strong earnings growth expectations.”
Inside the Model Portfolio
One of the components in this model portfolio is the WisdomTree U.S. SmallCap Dividend Growth Fund (DGRS ).
DGRS tracks the WisdomTree U.S. SmallCap Dividend Growth Index, which is weighted by fundamental factors such as growth expectations, return on equity and return on assets, according to WisdomTree.
“Quality companies also tend to be able to grow dividends faster over time, and they were stress-tested during this pandemic. Whereas 54% of the broad universe of 1,471 dividend payers have grown their dividends in 2020, 64% of the Quality Dividend Growth Index have,” according to Schwartz.
While the quality factor often trades at a premium to value, quality stocks are usually less volatile than traditional broad market strategies, indicating some overlap with the low volatility factor.
The quality investment factor can help investors focus on companies that are better equipped to handle uncertainties the markets may throw at us, sifting out corporations with questionable profit outlooks and rising debt levels as a way to hone in on those with solid fundamentals.
“For investors concerned about the top-heavy, growth-led run in the broad benchmark, our quality dividend growth strategy—which combines elements of quality and value—looks like an attractive alternative for widespread uncertainty and market volatility,” notes Schwartz.