Finetuning Value and Growth ETF Allocations Beyond the Russell 1000 Index

A better approach to growth stocks

The Russell 1000 Growth Index identifies its constituents based on several main metrics:

• Higher price-to-book ratios: Companies with higher valuations relative to their book value are prioritized.
• Higher forecasted medium-term (2-year) earnings growth: Emphasis is placed on companies expected to grow earnings significantly in the near future.
• Higher historical sales-per-share growth (5 years): Tracks companies with strong revenue growth trends over the past five years.

The index is reconstituted annually, adding or dropping companies based on these criteria. As FTSE Russell’s data below illustrates, the index does exhibit stronger growth characteristics compared to the broader Russell 1000 Index:

This is where the WisdomTree U.S. Quality Growth Index shines. Unlike the Russell 1000 Growth Index, this benchmark introduces a fundamental weighting methodology and evaluates companies on a composite score of growth and quality:

1. Growth:
   50% weight to median analyst earnings growth forecast.
   25% weight to trailing 5-year EBITDA growth. 25% weight to trailing 5-year sales growth.
   This broader approach ensures a more comprehensive growth analysis.
2. Quality:
   50% weight to trailing 3-year average return on equity.
   50% weight to trailing 3-year average return on assets.

These metrics assess how efficiently a company generates profits, reducing exposure to high-growth companies with weaker fundamentals.

When applied in practice via the WisdomTree U.S. Quality Growth Fund

, this methodology has led to marked outperformance.

Over the period from December 15, 2022, to December 18, 2024, QGRW delivered a CAGR of 42.60%, compared to 35.82% for the iShares Russell 1000 Growth ETF

. Moreover, QGRW offered a better risk-adjusted return, with a Sharpe ratio of 1.71 versus 1.62 for IWF.

A better approach to value stocks

A similar pattern emerges when examining the Russell 1000 Value Index, which essentially flips the criteria of the Russell 1000 Growth Index. Instead of screening for higher price-to-book, earnings growth, and sales-per-share growth, it focuses on the lower end of these metrics.

This results in a value-oriented composition, as seen in the table below. Compared to the broader Russell 1000 Index, the Value subset exhibits lower valuations and a higher dividend yield, though it comes at the expense of slower earnings growth:

While the index delivers on value metrics, it doesn’t screen for quality, leaving the door open for companies with weaker fundamentals.

A better-performing alternative has been the WisdomTree U.S. Value Fund

, which emphasizes shareholder yield as a key factor. Shareholder yield measures how much a company returns to its investors through cash dividends and net share repurchases relative to its market capitalization:

WisdomTree succinctly explains the appeal of this metric below:

“The type of company that is paying a dividend and also buying back stock probably has something going right in its day-to-day business. In contrast, companies that pay their shareholders nothing and also dilute them may be the type of firm whose income statement is splashed with red ink. Half the battle is picking up great companies that keep buying back stock, but the other part of the battle is getting out of the way of the proverbial sitting ducks.”

Beyond shareholder yield, WTV incorporates additional quality screens in the form of ROE and ROA, the same as QGRW. These ensure the fund excludes companies that rely on debt-fueled buybacks, focusing instead on financially sound firms. The methodology selects 100-200 companies, emphasizing a 50/50 composite of shareholder yield and quality.

This approach has delivered significant outperformance. Over the period from December 15, 2017, to December 18, 2024, WTV achieved a CAGR of 12.59% compared to just 8.20% for the iShares Russell 1000 Value ETF

. Risk-adjusted returns also leaned in WTV’s favor, with a Sharpe ratio of 0.56 versus 0.39 for IWD.

This article is for informational purposes only and does not in any way constitute investment advice. The author may express their own opinions, which may not represent the opinions of ETF Central or its affiliated partners. It is essential that you seek advice from a registered financial professional prior to making any investment decisions.