Two Ways to Invest in Quality with WisdomTree ETFs

WisdomTree U.S. Quality Growth Fund

QGRW

+0.26%

While investing in growth stocks has been a winning strategy over the last decade, a single-minded focus on rapidly expanding companies can be risky.

Firms that soared during the zero-interest-rate policy era of COVID-19, like Peloton, Carvana, and Zoom, have seen dramatic downturns as conditions changed. Implementing a quality filter helps sidestep such "junk" investments.

The WisdomTree U.S. Quality Growth Fund

utilizes the WisdomTree U.S. Quality Growth Index, which effectively integrates quality into the growth investing paradigm.

This index selects from the top 500 U.S. companies by market capitalization and scores them on two equally weighted factors: growth and quality, choosing the top 100.

For growth, the index criteria are:

• 50% weight to median analyst earnings growth forecasts.
• 25% weight to trailing five-year EBITDA growth.
• 25% weight to trailing five-year sales growth.

For quality, the index evaluates:

• 50% weight to the trailing three-year average return on equity.
• 50% weight to the trailing three-year average return on assets.

QGRW offers this methodology at a reasonable cost, charging a 0.28% expense ratio. It also boasts tax efficiency, reflected in a low 30-day SEC yield of 0.18% as of May 7, 2024.

Here's how QGRW has historically performed versus the iShares Russell 1000 Growth ETF

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WisdomTree U.S. Value Fund

WTV

-0.41%

Value investing benefits greatly from a quality screen by helping to avoid value traps. These traps occur when stocks appear inexpensive based on traditional valuation metrics but are actually priced low due to underlying issues that may impair their future performance and growth.

These traps occur when stocks appear inexpensive based on traditional valuation metrics but are actually priced low due to underlying issues that may impair their future performance and growth.

The WisdomTree U.S. Value Fund

is a prime example of an ETF that incorporates a quality screen into value investing. It uses "shareholder yield" as a key metric for screening value, which is calculated:

Shareholder Yield = (Cash Dividends + Net Share Repurchases) / Market Cap

This approach stands in contrast over traditional value investing methods that focus solely on high dividend yields, such as the famous "Dogs of the Dow" strategy that picks out the 10 highest yielding Dow Jones stocks every year.

WisdomTree's research, as of December 31, 2022, shows that companies with the highest shareholder yield outperformed the S&P 500 index by 29 basis points. Conversely, stocks with the lowest shareholder yield underperformed the index by 233 basis points.

To further refine its selection, WTV also employs a quality screen that evaluates return on equity (ROE) and return on assets (ROA). These metrics are combined with shareholder yield in a 50/50 ratio to form a composite score, identifying the top 100-200 companies.

WTV is even more cost-effective than QGRW, with an expense ratio of just 0.12%, and offers a 30-day SEC yield of 1.8%.

Here's how WTV has historically performed versus the iShares Russell 1000 Value ETF

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