• Lower P/E Ratio: Neither WTSDG nor the Russell 2000 Value Index uses P/E as a selection factor, but because of the unprofitable company exposure in the Russell 2000 Value Index, the P/E ratio of WTSDG is significantly lower. On the other hand, WTSDG does screen based on profitability, so it will typically exclude more of the unprofitable and speculative small caps.
• Better Growth Potential: Typically, firms with higher growth expectations tend to trade at higher valuations, but this is not the case when comparing WTSDG to the Russell 2000 Value. WTSDG incorporates long-term earnings growth expectations into its screening process, which helps explains the 3% advantage.
• Higher Dividend Yield: WTSDG selects its constituents by growth and quality and then weights these eligible companies based on their dividends, which typically increases the Index dividend yield.
• Higher Quality: The selection methodology for WTSDG focuses on quality factors like return on equity (ROE) and return on assets (ROA), and therefore, these numbers are significantly higher for WTSDG compared to the Russell 2000 Value Index. It is important to note that the market often demands a higher price (i.e., higher multiple) for quality companies.
• Higher Cumulative Return: we feel that WTSDG’s ability to offer lower valuations, higher growth expectations and higher quality characteristics is even more impressive considering the performance record. As we mentioned above, people usually equate higher prices with higher valuations, but that isn’t always the case. We feel that the fundamental characteristics of WTSDG are still very attractive across many statistics compared to the Russell 2000 Value, even given the strong outperformance since Index inception.
1Source: Bloomberg, as of 3/31/15.