Is the Nasdaq 100 the Best Proxy for Mega-Cap Growth Stocks?

The Nasdaq 100 Index is considered by many as the default benchmark for growth stocks.

The methodology is straightforward—the 100 largest non-financial companies by market capitalization listed on the Nasdaq Exchange. Securities are weighted by modified market cap.

One of the drawbacks to this simplicity for a growth benchmark is that mature, slow-growth companies can populate the index because of the absence of fundamental selection criteria.

In our view, WisdomTree has created a better way to capture growth—the WisdomTree U.S. Quality Growth Index. Since its launch near the end of 2022, it has outperformed the Nasdaq 100 while being more directly targeted to high-growth, high-profitability companies.

Cumulative Index Total Returns since 11/30/22

The returns for both the WisdomTree U.S. Quality Growth Index and Nasdaq 100 have, unsurprisingly, benefitted from a positive market backdrop for growth over the last 15 months.

WisdomTree’s Index reconstitutes on a semi-annual basis each June and December, refreshing its exposure to companies with the fundamental characteristics of high profitability and high growth.

Like the Nasdaq 100, the WisdomTree Index selects 100 securities. The Indexes hold 37 securities in common with a common holdings score (or overlap) of 62%.

WisdomTree U.S. Quality Growth Index and Nasdaq 100 Index (Benchmark) Holdings Overlap

To illustrate the emphasis on earnings growth/sales growth characteristics for the WisdomTree Index, we highlight two sets of companies in the below chart:

• Light blue dots—Five largest holdings in the WisdomTree U.S. Quality Growth Index that are not included in the Nasdaq 100 due to listing on the New York Stock Exchange:

• Mastercard, Visa, S&P Global, Blackstone, ServiceNow

• Dark blue dots—Five largest holdings in the Nasdaq 100 that are not included in the WisdomTree U.S. Quality Growth Index (due to profitability/growth screens):

• Costco Wholesale, PepsiCo, Comcast, Cisco Systems, T-Mobile US

A few observations:

• Higher growth in stocks unique to WisdomTree—The average earnings and sales growth for companies included in the WisdomTree Index but excluded from the Nasdaq 100 is 17.2% and 13.5%, respectively

• ServiceNow, which has a market cap over $150 billion, provides a good example of the type of fast-growth company excluded from the Nasdaq 100 because of its listing on the NYSE—it has grown sales 28% annualized over the last five years, and is projected by analysts to grow earnings by over 20% over the next several years

• Lower growth in stocks unique to Nasdaq—The average earnings and sales growth for companies included in the Nasdaq 100 but excluded from WisdomTree Index is just 10.4% and 7.9%, respectively

• Cisco Systems, on the other hand, has grown its sales at just 3% annualized and analysts expect earnings growth of just 5% going forward. Though not a growth company based on traditional fundamental metrics, the company is included in the Nasdaq 100 because of its market cap and listing on the Nasdaq

Growth Characteristics

A Better Approach to Growth: The WisdomTree U.S. Quality Growth Fund

The WisdomTree U.S. Quality Growth Index is a market-cap weighted Index that consists of companies with quality and growth characteristics. The top 500 U.S. companies by market cap—listed on any of the major U.S. exchanges—are ranked on a composite score of two fundamental factors: growth and quality, which are equally weighted.

The Index is comprised of the 100 U.S. companies (the first quintile) with the highest composite scores.

Growth factor: The growth factor is determined by a company's ranking based on a 50% weight in its median analyst earnings growth forecast, a 25% weight in its trailing five-year EBITDA (i.e., earnings before interest, taxes, depreciation and amortization) growth and a 25% weight in its trailing five-year sales growth.

Quality factor: The quality factor is determined by a company's ranking based on a 50% weight to each of its trailing three-year average return on equity and trailing three-year average return on assets.

The WisdomTree U.S. Quality Growth Fund was launched in December 2022 to seek to track the price and yield performance, before fees and expenses, of the WisdomTree U.S. Quality Growth Index.

Investment Process