ETF weighting and the common investor

Exchange traded fund weighting strategies are becoming increasingly important to investors.

Long-time market observer and Wharton School professor Jeremy Siegel has argued for decades that investors should consider alternatives to popular capitalization-weighted funds, especially ETFs that weight their holdings based on fundamental factors such as earnings growth, dividends, or momentum.

Now the tide is slowly turning. While capitalization-weighted funds are still the most widespread in the $ 5 trillion ETF market, issuers are becoming increasingly convenient to offer factor-weighted and other niche products.

WisdomTree launched its own US Growth and Momentum Fund (WGRO) in late June based on some of the factors highlighted by Siegel, an advisor to the company. The ETF tracks the O’Neill Growth Index, which uses the strategies of growth investor Bill O’Neill to find discounted games with high potential.

Jeremy Schwartz, Executive Vice President and Global Head of Research at WisdomTree, said that the success of both strategies depends on the market environment.

“Cap weighting is working incredibly well in these growth markets that you’ve had for the past 15 years,” he told CNBC’s ETF Edge this week. “The basics start to work when things really get mixed up.”

When markets get too expensive, realigning toward earnings growth and dividends can help, Schwartz said.

Although WGRO tracks an index, it is realigned monthly and has some of the highest turnover in the market, making it more active than even some actively managed funds, he said.

“Being active in this high-growth area, innovation and SPAC … could be very useful,” he said. SPACs are special acquisition companies that serve as blank checks for companies looking to go public.

For Andrew McOrmond, Managing Director of WallachBeth Capital, whether to invest based on market capitalization or fundamentals “really has to be based on your time horizon”.

“If your average investor is 35 years old, you can stay on track with market capitalization weighting when they retire at 65,” he said in the same “ETF Edge” interview. “But if you’re 60 now, with reviews where they are … you don’t want to be on the wrong side of this trade when it happens.”

WGRO is definitely more suitable for young investors, said McOrmond.

“You have to see all the growth and the upside. And I think the expense ratio is more than adequate to justify being in this ETF to be ready for some kind of downturn as well,” he said.

Mark Yusko, who runs a SPAC-based ETF, said in the same “ETF Edge” interview that the real debate is not between market capitalization and fundamental weighting, but between market capitalization and equal weighting.

“That’s the big difference. When you buy the S&P 500, 5-6% of it goes to Apple, whether you think it’s a good buy or not. And there is no choice, there is no decision, there is no thought.” said Morgan Creek Capital said the CEO and chief investment officer of management.

“With an equally weighted portfolio, you have more options for rebalancing and this monthly rebalancing – we have a similar rate to our ETF – is really important in my opinion,” said Yusko.

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