Home Interest rate WisdomTree Megatrends: A Pulse Check of Valuations as Interest Rates Rise

WisdomTree Megatrends: A Pulse Check of Valuations as Interest Rates Rise

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By Kara Marciscano

In late November, Federal Reserve Chairman Jerome Powell hinted at an accelerated reduction in the Fed’s easy money policy.

Since that announcement, Treasury yields have risen, reflecting expectations that in early 2022 the Fed will begin raising its key rate for the first time since 2018.

As my colleague recently wrote, a rising rate environment is often viewed more constructively for cyclical value stocks such as financials than for growth stocks captured in our ETF megatrend suite.

But this new rate cycle has created opportunities on both sides of the growth-value coin.

Our megatrend ETFs are trading at much more attractive valuations – take the pulse of the three that have been hit the hardest since late November.

WCLD – Down 14.7%1

The WisdomTree Cloud Computing Fund (WCLD) is currently valued at 11.5 times the price-to-sales ratio, its lowest level since the early months of the COVID-19 pandemic. Its premium over the Russell 1000 Growth Index is 102.0%, within 2% of its historical low of 100.8%.2

Although WCLD’s valuation premium has contracted significantly, its expected revenue growth relative to the benchmark has not. Over the past year, WCLD’s revenue growth has consistently been forecast to average 1.7 times that of the Russell 1000 Growth. Over the next 12 months, WCLD’s median revenue growth is 23%, 1.8 times the median revenue growth rate of 13% predicted for the Russell 1000 Growth Index.3

These levels could be attractive entry points into higher-growth cloud names, which Bessemer Venture Partner Byron Deeter recently spoke about on CNBC.4

WCLD – Price/sales ratio

WCLD - Price/sales ratio

WCLD Premium at Russell 1000 Growth – Price to Sales Ratio

WCLD Premium at Russell 1000 Growth Sales Price

Tree of Wisdom, FactSet

WCBR – Down 10.3%5

Like WCLD, the WisdomTree Cybersecurity Fund (WCBR) has been hit hard by market developments and is trading at a similar 11.2x price to sell, roughly double the index valuation. Russell 1000 Growth.

With just under a year of performance, WCBR traded in a narrower price-to-sales range than WCLD, but generated similar revenue growth metrics. Over the next 12 months, the median revenue growth rate forecast for WCBR is 20%, or 1.6 times the median revenue growth forecast of 13% for the Russell 1000 Growth Index.6 Notably, the WCBR’s expected growth rate differential relative to Russell benchmarks is wider than its historical average of 1.3x. The main finding is that WCBR’s relative valuation has compressed while its relative growth rate has increased.

WCBR – Price/sales ratio

WCBR Awards at Sales

Tree of Wisdom, FactSet

WDNA – Down 4%seven

The WisdomTree BioRevolution Fund (WDNA) was also not immune to the sell-off in growth stocks, but its decline was more modest than that of WCLD and WCBR.

Biotechnology is an inherently volatile market, and performance can be very different within the industry depending on the size of exposure. 2021 has been a very different year for small cap biotech indices compared to all cap biotech indices. The MSCI ACWI Biotechnology Index returned 8%, while the small cap cut of this index returned -22.3%, equating to a 30 percentage point gap within the same sector.8 This level of all-cap outperformance hasn’t happened in at least the past decade and marks a sharp reversal from the small-cap outperformance of 32 percentage points in 2020.

In our view, this environment creates an opportunity for WDNA, with balanced exposure across small, mid and large caps, to benefit from a potential rebound in biotech small and mid caps in 2022.

$100 Growth – Since WDNA’s Inception

$100 growth since inception of WDNA

Tree of Wisdom, FactSet, Bloomberg

Takeaway meals

For investors who were worried about the frothy valuations of high-growth stocks, today’s multiples offer a significantly cheaper entry point for long-term exposure to specific secular and economic megatrends.

1 Sources: WisdomTree, FactSet, for the period from 11/29/21 to 01/04/22. Period chosen since the Federal Reserve has indicated a potential end to the easing of monetary policy. Performance at NAV.

2 Sources: WisdomTree, FactSet, as of 04/01/22.

3 Sources: WisdomTree, FactSet, as of 04/01/22; There is no guarantee that any projection, forecast or opinion will come true. Actual results may vary.

4 “Cloud basket looks like a buying opportunity: Byron Deeter of Bessemer Venture Partners”, YouTube video, 2:47, published by “CNBC Television”, January 4, 2022.

5 Sources: WisdomTree, FactSet, for the period from 11/29/21 to 01/04/22. Period chosen since the Federal Reserve has indicated a potential end to the easing of monetary policy. Performance at NAV.

6 Source: WisdomTree, FactSet as of 4/1/2022. There is no guarantee that any projection, forecast or opinion will come true. Actual results may vary.

seven Sources: WisdomTree, FactSet, for the period from 11/29/21 to 01/04/22. Period chosen since the Federal Reserve has indicated a potential end to the easing of monetary policy. Performance at NAV.

8 WisdomTree, Bloomberg, for the period 12/31/20-12/31/21.

Important risks related to this article

Performance data quoted represents past performance and does not guarantee future results. Actual performance may be lower or higher than quoted performance data. The return on the investment and the value of the principal will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Returns less than one year are not annualized. For current standard performance, holdings and expenses, visit the respective fund page: WCLD, WCBR, WDNA.

WCLD: There are risks associated with investing, including possible loss of capital. The Fund invests in cloud computing companies, which are highly dependent on the Internet and use a distributed network of servers on the Internet. Cloud computing companies may have limited product lines, markets, financial resources or personnel and are subject to the risks of changes in business cycles, global economic growth, technological progress and government regulation. These companies typically face intense competition and potentially rapid product obsolescence. In addition, many cloud computing companies store sensitive consumer information and could be the target of cybersecurity attacks and other types of theft, which could negatively impact these companies and the Fund. . Stocks of cloud computing companies tend to be more volatile than stocks of companies that are less reliant on technology and, specifically, the internet. Cloud computing companies can typically incur significant research and development expenses, and rapid changes in the field could have a significant negative effect on a company’s operating results. The composition of the Index is highly dependent on quantitative and qualitative information and data from one or more third parties, and the Index may not perform as intended. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile.

WCBR: There are risks associated with investing, including possible loss of capital. The Fund invests in cybersecurity companies, which generate a significant portion of their revenue from security protocols that prevent intrusions and attacks on systems, networks, applications, computers and mobile devices. Cybersecurity companies are particularly vulnerable to rapid changes in technology, rapid obsolescence of products and services, loss of patent, copyright and trademark protection, government regulation and competition. , both nationally and internationally. Shares of cybersecurity companies, especially those related to the Internet, have in the past experienced extreme fluctuations in price and volume that have often been unrelated to their operational performance. These businesses may also be smaller, less experienced businesses with limited product or service lines and markets or financial resources and fewer experienced management or marketing personnel. The Fund invests in securities included in or representative of its index, regardless of their investment merit, and the Fund does not attempt to outperform its index or take defensive positions in falling markets. The composition of the Index is highly dependent on quantitative and qualitative information and data from one or more third parties, and the Index may not perform as intended. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile.

WDNA: There are risks associated with investing, including possible loss of capital. The Fund invests in BioRevolution companies, which are companies that have been significantly transformed by advances in genetics and biotechnology. BioRevolution companies face intense competition and potentially rapid product obsolescence. These companies may be adversely affected by the loss or deterioration of intellectual property rights and other proprietary information or by changes in government regulations or policies. In addition, BioRevolution companies may be subject to risks associated with genetic analysis. The Fund invests in securities included in or representative of its index, regardless of their investment merit, and the Fund does not attempt to outperform its index or take defensive positions in declining markets. The composition of the Index is governed by an Index Committee, and the Index may not perform as intended. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile.

Kara Marciscano, CFA, Partner, Research

Kara Marciscano joined WisdomTree in October 2018 as a research analyst. It supports the creation, maintenance and reconstitution of our actively managed indices and ETFs. Prior to joining WisdomTree, Kara was Assistant Vice President of Equity Research at Barclays covering the insurance sector as well as at Berkshire Hathaway. She started her career in the finance department of Barclays after graduating from Boston College in 2014 with a BS in finance and operations management. Kara holds the Chartered Financial Analyst designation.

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Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.