WisdomTree Puts Twist on Large-Cap Index

Since it launched its first dividend-weighted ETF, WisdomTree has ventured into several areas, the latest being a fundamental weighting of growth companies in its new WisdomTree Large Cap Growth Fund(ROI Quote).

The basic idea is to screen and weight the top 300 stocks in the Russell 1000 Growth Index for growth in earnings per share, sales per share, book value per share and stock price per share. (The iShares Russell 1000 Growth Index Fund(IWF Quote) is a good proxy.)

The result is a mix of large-cap stocks that looks similar to the holdings in IWF. Not surprisingly, it back-tests pretty well over the long term. Then again, new ETFs tend to back-test well to ensure they're successful. In the 12 months ended Sept. 30, the back test lagged the benchmark by 1.36%.

In looking under the hood, it is easy to spot some areas that stand to be crucial in determining whether ROI will beat or lag its benchmark. At the sector level, ROI has 30.6% in technology, compared with 24.8% for IWF. Many an investment manager has been incorrectly bullish on tech over the past couple of years. The process underlying ROI may show that tech is attractive, but there is no cause and effect that says tech has to do well.

ROI is also quite a bit heavier in financials at 12.9% vs. 6.1% for IWF. Financial stocks were the leader on the way down in this bear market. History does not support the notion that they would lead in the next bull market, but it would be reasonable to expect some leadership during any bear-market rallies.