WisdomTree partners with O’Neil Global Advisors for US growth & momentum ETF

Jun 30th, 2021 | By | Category: Equities

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WisdomTree has teamed up with quantitative investment specialists O’Neil Global Advisors for the launch of a new US equity ETF focused on high-growth and momentum stocks.

WisdomTree partners with O’Neil Global Advisors for US growth & momentum ETF

Jeremy Schwartz, Global Head of Research at WisdomTree.

Listed on Nasdaq, the WisdomTree US Growth & Momentum Fund (WGRO US) tracks the O’Neil Growth Index and comes with an expense ratio of 0.55%.

The underlying index has been designed to overcome two challenges associated with growth investing: identifying companies that are in the early stage of the growth cycle and avoiding the inevitable drawdowns that many growth stocks experience after significant positive performance.

Jeremy Schwartz, Global Head of Research at WisdomTree, said: “An aggressive-growth investment strategy may come with significantly higher volatility. The WisdomTree US Growth & Momentum Fund aims to solve this challenge by seeking to capture the upside of an aggressive growth portfolio, while attempting to limit the downside risk after the market tops and corrects, which is historically inherent with growth investing.”

The index seeks to achieve these objectives by combining traditional fundamental growth principles with techniques applied in momentum investing.

Momentum investing is an investment style that emphasizes the allocation to securities that have had higher recent price performance compared to other securities, with the expectation that this trend will continue to produce short-term excess returns in the future.

By taking cues from momentum signals, the index endeavours to improve the timing of entry points during small pullbacks and to avoid holding growth stocks that are extended. It also seeks to maintain a targeted focus on genuine growth stocks in a bid to minimise any incidental exposure to value stocks that may be exhibiting strong momentum characteristics which are prone to being incorporated into regular momentum portfolios.

The index does all this by analysing and processing a combination of technical and fundamental factors, including various proprietary measures developed in-house by O’Neil Global Advisors.

These include (i) Pullback, which ranks stocks based on their long-term momentum and short-term mean reversion characteristics (based on price volatility and returns over a 10-day period) with the expectation to increase exposure to stable growth stocks with positive recent price momentum, (ii) Volatility, a calculation of the standard deviation of returns over a one-year period, (iii) Datagraph Rating, a proprietary composite measure of multiple growth characteristics including earnings, capitalization, stock ownership, relative price strength, price-volume characteristics, industry group rank, and other growth factors, and (iv) Hotness, which measures a stock’s recent change in volume compared to historical averages to determine the relative level of speculative interest in a stock.

The index methodology selects the top 50-100 stocks as determined by these four factors and weights them according to an optimization algorithm that seeks to maximize exposure to securities with high factor scores while simultaneously minimizing both the exposure to any individual security and portfolio turnover. Stocks that score favourably across multiple factors receive a greater weight.

In general, market conditions that favour growth stocks are likely to result in fewer index constituents (with a minimum of 50) and more portfolio conviction, while market conditions that favour value stocks are likely to result in a less concentrated and more diversified portfolio of growth stocks with a larger number of index constituents (with a maximum of 100).

To be eligible for inclusion in the index, a company must also have a market capitalization of at least $250 million and an average daily volume of at least $1m in each of the preceding three months.

The index is reconstituted and rebalanced monthly.

There are currently 70 constituents. Major positions include Enphase Energy (2.27%), Roku (2.23%), Generac (2.19%), Crowdstrike (2.11%), Deckers Outdoor (2.04%), Pinterest (2.04%), Bill.com (2.03%), Etsy (2.01%), Hubspot (1.99%) and MercadoLibre (1.96%). At the sector level, the consumer discretionary (33.09%) and information technology (23.42%) sectors account for more than half of the fund, followed by industrials (12.73%) and communication services (11.22%).

“For the last decade, momentum was synonymous with growth investing, but due to value stock performance over the last six months, many momentum strategies now have a significant value bent to their underlying portfolios, impacting investors who allocate to value on a standalone basis already. WGRO is expected to have a consistent growth orientation in constructing its portfolio due to the O’Neil proprietary factors incorporated into its Growth Index, including the Datagraph Rating in particular,” added Schwartz.

The fund is likely to appeal to growth investors who are increasingly anxious that an equity market correction might be on the horizon, and to momentum investors who are concerned that their portfolios are progressively incorporating more value-oriented names than the usual growth stocks that have typically been associated with momentum strategies in the past.

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