Introducing a New Growth ETF with a Twist
By Simon Maierhofer
December 5, 2008

SAN DIEGO (ETFguide.com) - Neither large caps nor growth ETFs have offered shelter in the stock market’s meltdown. Nevertheless WisdomTree unveiled a new ETF that competes against “big boys” like the iShares Russell 1000 Growth (NYSEarca: IWF) and iShares S&P 500 Growth ETF (NYSEarca: IVW).

Unlike Russell and Standard & Poor’s which apply their growth screens to existing index constituents (Russell 1000, S&P 500), the new Wisdom Tree ETF filters all eligible companies through their screen and selects the highest scoring 30% of the largest 1,000 companies.

Never miss a beat >> Sign up for the #1 FREE ETF Newsletter

The WisdomTree LargeCap Growth Fund (NYSEarca: ROI) ranks eligible stocks based on a composite score comprised of the following four metrics: annual earnings per share growth; annual sales per share growth, annual book value per share growth and annual stock price growth.

As you’d expect, this unique security selection metric yields a different list of securities. Only about half of the top 20 holdings are the same. Most notably, companies like Berkshire Hathaway (NYSE: BRK-A) AT&T (NYSE: T) Coca-Cola (NYSE: KO) and Google (NASDAQ: GOOG) made the top ten list of ROI while being absent in IWF and IVW.

                                                         Top 4 Most Popular Articles:

                                                      - Will The Dow Break Below 7,500?
                                                     - 3 Tell-Tale Signs Of A Sucker Rally 
                                                   - 3 Keys To Spotting A Market Bottom 
                                    - Down $16 billion - Has Warren Buffett Lost His Touch?

A deeper look, “under the hood” further reveals significant differences in the weighting methodology. Russell and S&P Indexes are market cap weighted while the new WisdomTree ETF is earnings (company’s net income excluding special items) weighted. ROI’s top five holdings account for 31.05% while IWF and IVW’s top five holdings make up only 13% of the index.

According to ETFguide’s Index Strategy Database (see only database that sorts ETFs by security selection and weighting methodology), 63 other equity ETFs use a similar index strategy (screened security selection and fundamental weighting). Only 21 equity ETFs in this category are issued by companies other than WisdomTree.

WisdomTree’s existing line-up of “Earnings ETFs” is similar to ROI as is RevenueShares’ approach. RevenueShares applies a revenue weighting methodology to the large, mid and small cap segment of the S&P 500 (AMEX: SPY). The pool of stocks to draw from is thus limited to the S&P 500. The LargeCap RevenueShares ETF (NYSEarca: RWL) has matched the performance of the iShares Russell 1000 (NYSEarca: IWB) and Vanguard Growth ETF (NYSEarca: VUG).

Never miss a beat >> Sign up for the #1 FREE ETF Newsletter

After everything is said and done, all boats rise and fall with the tide. ROI will be no different than any other growth ETF. However, once the markets can stage a sustainable rally, weighting methodology and security selection can become more than just technical nuances. Earnings are the first tangible signs of an upturn, earnings weighted indexes might thus be the first to benefit.