Growth investing, particularly with large- and mega-cap stocks, has paid off for investors in recent years. For example, both the Nasdaq 100 (NDX) and the S&P 500 Growth indexes sharply outpaced the S&P 500 this year and over the past two years.
However, not all growth strategies are created equal. The WisdomTree U.S. Quality Growth Fund (QGRW ), which turned two years old earlier this month, is proof positive of that assertion. It also proves accurate the notion that the intersection of quality and growth can reward investors over extended holding periods.
Not only has QGRW beaten the S&P 500 over the past two years, it’s also soundly outperformed the aforementioned growth indexes. Moreover, QGRW’s success confirms there are multiple ways to approach growth investing. Relying on the momentum factor, while useful, isn’t always the best approach.
QGRW Methodology Matters
Many traditional growth indexes simply weight stocks by market capitalization. It’s a strategy that’s worked and by incident, not intent, it’s created some ETFs with large exposures to quality stocks such Apple (AAPL) and Microsoft (MSFT), among others. However, QGRW’s quality overlay is intentional and the results speak for themselves.
“The quality factor is determined by a company’s ranking based on a 50% weight to its trailing three-year average return on equity and trailing three-year average return on assets,” noted WisdomTree’s Matt Wagner.
The top five holdings in QGRW’s roster combine for approximately 43% of the ETF’s roster, making it concentrated. However, many large-cap growth indexes are heavily concentrated and QGRW’s performance hasn’t been derailed as a result. Arguably, it can be inferred that QGRW is concentrated on quality. That methodology possibly presents investors with a better mousetrap than traditional index funds.
“For example, the return on assets (ROA) for the Index is more than three times that of the S&P 500 while also having a trailing five-year sales growth of more than seven percentage points higher,” added Wagner.
In simple terms, QGRW’s mission — one the ETF accomplishes — is to steer clear of momentum stocks lacking clear quality credentials. One example is MicroStrategy (MSTR), which is highly correlated to bitcoin. As a result of the cryptocurrency’s surge, MicroStrategy’s market value has ballooned. This qualifies it for entry into some well-known growth indexes, but it’s not part of the QGRW roster.
“This is the case with a company like MicroStrategy—the company has had negative GAAP earnings over the last three quarters and is expected to have negative GAAP Accepted Accounting Principles (GAAP) earnings in the fourth quarter, as well,” concluded Wagner.
For more news, information, and analysis, visit the Modern Alpha Channel.
This article was prepared as part of WisdomTree’s general paid sponsorship of VettaFi | ETF Trends. This specific content within and any opinions expressed therein belong solely to VettaFi and do not reflect the opinion or analysis of WisdomTree, its employees, or its affiliates. Content published on VettaFi | ETF Trends is provided for educational purposes only and should not be considered investment or tax advice. For investment or tax advice, please consult a financial professional.
WisdomTree is an independent company, unaffiliated with VettaFi | ETF Trends. WisdomTree has not been involved with the preparation of the content supplied by VettaFi | ETF Trends. It does not guarantee, or assume any responsibility for its content.
