2017 was the year of growth over value—year-to-date through December 1st, the S&P 500 Growth Index outperformed the S&P 500 Value Index by essentially double the return, or a 1,300 basis point (bps) spread.

Year-to-Date Total Returns of Value vs. Growth

This performance advantage for growth investing largely stemmed from an over-weight in the Information Technology sector—approximately 800 bps of the differential was driven by Information Technology, with the other 500 bps or so coming from a combination of over-weights in Consumer Discretionary, under-weights in Energy and better Health Care stock returns.

WisdomTree conducts an annual rebalance of its earnings-weighted family every December. This once-a-year process incorporates a rules-based discipline to sell what is becoming more expensive on a price-to-earnings (P/E) basis and buy what is becoming cheaper on that basis. This, by definition, incorporates an element of anti-momentum trading and valuation tilting to lower-priced segments of the market. With this headwind of value lagging growth considerably, you would think this was a difficult performance environment for the WisdomTree U.S. Earnings 500 Index.

Returns-based style analysis shows a best-fit regression model for the WisdomTree U.S. Earnings 500 Index would be allocated 61% to the S&P 500 Value Index and 36% to the S&P 500 Growth Index, showing a clear value tilt.

But reviewing year-to-date returns through December 1st, the WisdomTree Earnings 500 Index outperformed the market. What is going on here?

Year-to-Date Total Return Comparison

One key differential in the traditional value index and the WisdomTree U.S. Earnings 500 Index: the Information Technology sector was a drag on this index, as more expensive Information Technology stocks led the way higher. But unlike the S&P 500 Value Index, which only had 7% Information Technology, the WisdomTree U.S. Earnings 500 Index had its biggest sector exposure in Information Technology and only a modest 90 bps under-weight in the S&P 500.