As advisors well know, value is the factor getting most of the adulation this year. Yet quality should not be ignored.
Advisors can access both factors for integration into client portfolios with WisdomTree’s Core Equity Model Portfolio, which is part of the issuer’s broader series of Strategic Building Blocks model portfolios. The model portfolio could be a prime idea for client portfolios because it appears the value resurgence will last awhile.
“The change in leadership occurred approximately six months into value’s bull run. We are about six-to-nine months into the current cycle, depending on how you track it,” writes WisdomTree analyst Matt Wagner. “There are still many factors in favor of value relative to growth, including historically attractive relative valuations and mean reversion after more than a decade of value underperformance.”
A Good Time for This Model Portfolio?
The Core Equity Model Portfolio is home to 11 exchange traded funds, including WisdomTree products and ETFs from third-party issuers. Many of the of the WisdomTree ETFs in the model portfolio have distinct quality leanings, which is relevant at a time when the value rally is largely being fueled by low-quality companies.
“We think investors should focus on higher-quality value names. Recent returns have favored companies with low (or no) profits—the distressed value names—but history suggests profitability is an important factor for long-run returns,” adds Wagner.
Enhancing the allure of this model portfolio is the fact that quality is not only durable among investment factors, it’s currently on sale. Investors usually have to pay up to access quality stocks, but that’s not the case at the moment, indicating that while not all of the value space offers quality, there’s value to be had with the quality factor.
Quality is relevant for another reason: in the recovery phase of the economic cycle, investors can afford junkier value names some latitude. That scenario is playing out again today. However, as the mid-cycle period sets in, the quality factor tends to outperform.
“In the next phase of the cycle, we believe quality value companies are more likely to lead as investors become more discerning about profitability and balance sheets,” continues Wagner.
Members of the Core Equity Model Portfolio include the WisdomTree U.S. Quality Dividend Growth Fund (NasdaqGM: DGRW) and the WisdomTree Earnings 500 Fund (NYSEArca: EPS).
For more on how to implement model portfolios, visit our Model Portfolio Channel.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.