Through Kara Marciscano, CFA
WisdomTree American Growth and Momentum Fund (WGRO) recently completed its sixth rebalancing since launching in June 2021.
The Fund is currently WisdomTree’s second best performing strategy since the start of the quarter (+ 12.7%) and the fifth best performing strategy since its launch date (+ 12.9%).1 The Fund notably outperformed the S&P 500 Index by 1.87% and slightly outperformed the Russell 1000 Growth Index 0.16% since its creation.2
The performances are historical and do not guarantee the future results. Actual performance may be lower or higher than stated. Investment returns and the principal value of an investment fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Standardized performance data for the most recent quarter and month-end is available here.
The strategy uses a combination of four factors exclusive to O’Neil that seek to time entry points into stocks during small pullbacks and avoid holding stocks that are overexploited. These four factors are:
- withdrawal – a technical factor that measures a stock’s long-term dynamics and short-term average reversion characteristics, targeting stable growth stocks with recent positive price action
- Volatility – aims to reduce the long-term volatility of the portfolio
- Datagraph Rating â¢ – a composite growth characteristic to target companies with market leadership and strong fundamentals
- Heat – a measure of recent changes in the volume of a stock compared to historical averages, which seeks to reduce portfolio volatility and avoid stocks with high short-term speculative interest
Different from the many competitors of momentum ETFs which rebalance semi-annually or quarterly, WGRO rebalance monthly to adapt to changing market signals.
During the last six rebalancing cycles, WGRO has seen notable changes in sector allocations:
- Since its creation, WGRO Maintained an overweight stance in the consumer discretionary sector relative to the S&P 500 and Russell 1000 growth indices. WGRO gradually reduced its exposure on each rebalance from 33% at inception to 17% in November. During the same period, consumer discretionary was the second and fourth best performing sector on the S&P 500 and Russell 1000 growth indices, respectively.3
- WGRO dramatically increased its healthcare exposure during the October rebalance during a timely drop in healthcare stocks, as measured by the S&P 500 Healthcare Index. The Fund added 10 new names in the healthcare industry that ranked first in the pull-down factor.
S&P 500 Healthcare Index
- WGRO has also made a 7% net contribution to its financials exposure since inception. At the most recent rebalancing, WGRO added four new financial stocks that ranked well on both Pullback and Datagraph factors. During the same period, financials in the S&P 500 Index were the third best performing sector group (+ 11.5%).4
Attractive valuation and fundamentals
Quarter to date, WGRO managed to outperform both the S&P 500 and Russell 1000 growth indices while maintaining fundamental growth rates and discounted valuation.
WGRO has consistently generated revenue growth of approximately 4% above the Russell 1000 Growth Index and 10% above the S&P 500 Index.
It is important to note that the strong revenue growth generated by WGRO is also observed in the growth of net profits, which testifies to the operational efficiency of the companies captured in the basket. There is a large gap between the profit growth generated by WGRO and benchmarks. On average, WGRO’s earnings growth is about 40 percentage points higher than that of companies included in the S&P 500 or Russell 1000 growth indices.
WGRO is currently attractively valued at 19.2x futures price / earnings (P / E) compared to 22.5x and 33.8x for the S&P 500 and Russell 1000 Growth Indices, respectively. This Evaluationreduction is consistent with the historical median discount relative to these benchmarksâWGRO was rated around 5 and 15 P / E forward falls below the S&P 500 and Russell 1000 growth indices, respectively.5
Fundamental and valuation spreads are largely due to the composition of WGROâIts main holdings are less concentrated and very different from what is typically captured by US large-cap growth indices.
Given the strategy’s higher fundamental growth and lower valuation, WGRO may be of interest to investors who wish to allocate mid-cap and large-cap US growth stocks at discounted multiples. The Fund’s monthly rebalancing schedule may also make it attractive to investors seeking to move towards a dynamic strategy that responds more frequently to changes in the market environment.
1Source: Tree of Wisdom. Performance at the net asset value for the periods from 09/30/21 to 11/22/21 and from 06/23/21 to 11/22/21.
2Sources: WisdomTree, Bloomberg, for the period 6/23/21 to 11/09/21. WGRO performance at NAV.
3Sources: WisdomTree, Bloomberg, for the period 6/24/21 to 11/21/21. Consumer discretionary stocks within the S&P 500 and Russell 1000 growth indices returned 14.3% and 14.75% respectively.
4Sources: WisdomTree, Bloomberg, for the period 6/23/21 to 11/09/21.
5Sources: WisdomTree, FactSet, for the period 06/23/21 to 11/09/21.
Significant risks associated with this article
There are risks associated with investing, including possible loss of capital. The Fund invests in mid to large capitalization companies that provide exposure to a portfolio of high growth and dynamic US listed companies. Securities that exhibit momentum characteristics may be more volatile than the market as a whole. Growth stocks, as a group, can be out of favor in the market and underperform value stocks or the overall stock market. The Fund may experience high portfolio turnover as a result of rebalancing or adjusting its index. 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 expected. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.