WisdomTree targets mid & small-caps with new ‘Quality Growth’ ETFs

Jan 31st, 2024 | By | Category: Equities

WisdomTree has augmented its range of US equity ETFs, introducing two new funds focusing on mid and small-cap stocks, specifically targeting companies exhibiting both quality and growth attributes.

Jeremy Schwartz, Global Chief Investment Officer at WisdomTree

Jeremy Schwartz, Global Chief Investment Officer at WisdomTree.

The WisdomTree US MidCap Quality Growth Fund (QMID US) and WisdomTree US SmallCap Quality Growth Fund (QSML US) have been listed on Nasdaq, each with an expense ratio of 0.38%.

Numerous studies have consistently shown that higher-quality companies tend to outperform the broader equity market over the long term.

While the quality factor is often linked with large-cap stocks, thanks to their strong brand recognition, global market access, consistent cash flows, and favorable financing rates, WisdomTree notes that the performance gap between high-quality and low-quality companies, as measured by profitability and efficiency, is more pronounced in the small-cap space compared to their larger-cap peers.

WisdomTree’s strategy of combining both quality and growth-focused approaches aims to capture fast-growing companies that also boast solid fundamental qualities, effectively sidestepping overly speculative firms lacking in robust profitability. The newly launched ETFs offer an opportunity for core US mid and small-cap portfolio exposure, intentionally avoiding the pitfalls of “story stocks” characterized by low or negative profitability.

The new funds are linked to proprietary indices that rank their respective starting universes based on a composite score of two equally weighted fundamental factors: growth and quality.

The growth factor is determined by a company’s median analyst earnings growth forecast, its trailing five-year EBITDA growth, and its trailing five-year sales growth. The quality factor, meanwhile, is determined by a company’s trailing three-year average return on equity and trailing three-year average return on assets.

Each index selects approximately the top 30% of companies within its universe when ranked by composite score and weights them by market capitalization.

Jeremy Schwartz, Global Chief Investment Officer at WisdomTree, commented: “The recent divergent and rather large spreads between major growth indexes make it abundantly clear that having the right index screens and rebalancing process are critical for performance.

“Certain growth indexes removed the strongest technology and growth names ahead of the 2023 mega-cap tech rally due to momentum screens that ranked those stocks poorly at year-end 2022. Certain other small-cap growth indexes include as much as 40% of speculative, unprofitable companies that appear particularly vulnerable in today’s higher interest rate environment that makes capital raising to fund operations more difficult.

“By employing a process that focuses on large-, mid-, and small-cap stocks scoring highly on a combined feature set of robust quality and strong earnings and sales growth, we believe QMID and QSML are not just sound long-term factor strategies but a great combination for today’s macro landscape.”

The new listings complement the $150 million WisdomTree US Quality Growth Fund (QGRW US) which delivers the same strategy on a starting universe of US large-cap equities. QGRW comes with an expense ratio of 0.28%.

Tags: , , , , , ,

Leave a Comment