Investors often hear about the benefits of diversification. That’s often interpreted as building a portfolio with a lot of stocks or funds. However, there are examples of diversification being attained with a smaller number of holdings. ETFs can go a long way toward accomplishing that objective.
Take the cases of the WisdomTree U.S. Value Fund (WTV ) and the WisdomTree U.S. Quality Growth Fund (QGRW ). As the names of those ETFs imply, WTV is a value fund, while QGRW is a credible alternative to traditional large-cap growth offerings. Like standard growth indexes, QGRW features ample exposure to the Magnificent Seven stocks, while WTV brings a balanced, shareholder yield-driven approach to value investing.
Pairing the ETFs under the umbrella of one portfolio can accomplish the same objectives as owning a basic S&P 500 index fund while providing the opportunity for a better total return profile.
“WTV’s large-cap holdings are smaller than the S&P 500, which is helpful in a combo with QGRW, which has a lot of Mag 7. Because WTV is screening for shareholder yield, which is dividends plus buybacks, it picks up stocks and sectors that are at large valuation discounts to the S&P 500,” noted Jeff Weniger, head of equity strategy at WisdomTree.
QGRW, WTV Pairing Has Perks
On a stand-alone basis, both QGRW and WTV offer investors benefits. For example, the growth ETF has beaten old-guard rivals over the past several years due in part to the fact that it has more Magnificent Seven exposure than many competitors. Likewise, WTV’s focus on buybacks and dividend growth has resulted in a better-performing value mousetrap.
“Since the inception of QGRW in 2022, the blend has outpaced the S&P 500, offering heady returns with lower risk. In the longer time series, WTV goes back to early 2007,” added Weniger. “Putting the two Funds together in a 50/50 blend creates a sector profile that is similar to that of the S&P 500, but with all of the profitability, dividend and buyback screens that people associate with WisdomTree.“
Compelling Fundamental Metrics
A combined QGRW/WTV portfolio results in top 10 holdings that are similar to those found in the S&P 500. But that combination results in compelling fundamental metrics that could be harbingers of better long-term returns.
“In the 50% WTV/50% QGRW basket, the shareholder yield comes out to 3.6%, while the forward P/E multiple is 18.7. That compares to the S&P 500’s 1.9% shareholder yield and forward multiple of 22.7. We believe the appeal of the mix is that those discounts come despite a higher return on equity (ROE). The 50/50 has an ROE of 23.9% compared to 17.7% for the S&P 500,” concluded Weniger.
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