Easily one of the most popular strategies for investors
seeking to slice the market down to a more manageable amount of
securities is to split stocks into 'value' and 'growth'. This
technique looks to put stocks with below average PEs and more
stable earnings pictures in one bucket, and then riskier stocks
with higher growth potential into another.
This approach has proven to be extremely popular with ETF
investors as evidenced by the large number of funds that have
either a value or growth tilt. By our count, there are close to
90 that utilize either approach-in some form-- in the American
market with over $90 billion in total AUM in the space (read
Small Cap Value ETF Investing 101
).
This proliferation of value and growth
ETFs
has allowed those who swear by a particular style to easily
invest in their type of stock without having to worry about the
competing approach. Yet while these ETFs have become incredibly
popular, some investors may be surprised to find out just how
much some of these ETFs have in common.
Often times, if you are to remove the 'blend' choice from
classifying stocks, there is considerable overlap between value
and growth securities. After all, when a stock has a moderate PE,
decent growth prospects and a low but still near-average
dividend, where do you put it; in growth or value ETFs?
The dilemma often actually results in stocks being in both
growth and value ETFs, so many times a value and a growth fund
have some of the same top securities. Take for example the
iShares S&P 500 Growth ETF (
IVW
)
and the
iShares S&P 500 Value ETF (
IVE
)
.
Both of these ETFs are extremely popular with more than $10
billion in combined AUM. Furthermore, the both target large cap
stocks, so the distinction between value and growth should be
relatively easy, especially when compared to small caps, and to a
lesser extent, mid cap securities (read
Mid Cap ETF Investing 101
).
However, IVE holds 367 stocks in its basket while the growth
version, IVW, has 284 stocks in its basket. If you haven't
noticed, this adds up to well over 500 stocks, so clearly there
is some overlap considering that both track segments of the
S&P 500 Index.
In fact, of the top ten holdings in each fund,
Exxon Mobil (
XOM
)
manages to find its way into both the growth and the value
versions, while several other large companies, like
MSFT
or
ORCL
, are in the top twenty of both.
This suggests that the index managers have an extremely hard
time deciding how to classify some of the biggest companies out
there and that instead of these funds operating in tandem-as one
might expect-they seemingly operate independently of each other
(read
11 Great Dividend ETFs
).
Can You Avoid This?
Luckily for investors out there, there is an easy-but often
overlooked-- way to avoid this phenomenon in the ETF space. It
can easily be done with the 'pure' growth or value ETFs that are
currently on the market.
These funds weight stocks by style scores and not market cap,
seeking to only include the purest of the growth and value stocks
in a particular benchmark. In essence their approach gets rid of
that dangerous overlap and only zeroes in on the stocks that have
the most apparent growth or value characteristics for inclusion
in the index (see
Active Large Caps ETFs: The Best of Both
Worlds?
).
While this approach definitely limits the number of securities
in each ETF that utilizes the methodology-and thus may present
more of a concentration risk-it also ensures that if an investor
were to buy both the growth and the value ETFs they wouldn't be
doubling up on the same securities.
The main purveyor of these securities on the market right now
is Guggenheim, and while the company has 'pure' growth and value
ETFs for small caps and mid caps, we have taken a closer look at
their large cap version-which are direct competitors to the
aforementioned iShares ETFs-below for those considering a play on
growth or value ETFs in the large cap market as we close out the
year:
Guggenheim S&P 500 Pure Value ETF (
RPV
)
This ETF hones in on value stocks, following the S&P 500
Pure Value Index. This results in a fund that has 113 securities
while charging investors 35 basis points a year in fees.
Holdings are focused on the financial market (39%), while
energy (10.3%) and consumer discretionary (9.8%) stocks round out
the top three. Top stocks in the fund include
Whirlpool (
WHR
)
,
Computer Sciences (
CSC
)
, and
American International Group (
AIG
)
which together make up about 9% of the total (read
Two ETFs for the Muddle Through Economy
).
The fund only has about $84 million in assets so the approach
clearly hasn't caught on, especially when looking at the paltry
volume of just 15,000 shares a day. This does suggest that bid
ask spreads will be a little higher, but the focus on large caps
should keep this relatively small overall.
Guggenheim S&P 500 Pure Growth ETF (
RPG
)
For those focused on outsized growth rates, RPG, a fund that
tracks the S&P 500 Pure Growth Index, could be the way to go.
The fund has a few more securities in its basket, 133, while its
PE is quite high at just over 50 suggesting an incredible focus
on growth.
Top sectors are unsurprisingly focused on health care,
consumer discretionary and technology, each of which account for
at least 21% of the total. In term of the biggest holdings,
Alexion Pharma (
ALXN
)
,
Apple (
AAPL
)
, and
Visa (
V
)
are the top three, although they combine to take up less than 5%
of the total assets in RPG.
RPG does have a bit more in assets and volume than its value
counterpart with over $300 million in AUM and volume of 39,000
shares a day. As a result, bid ask spreads will be somewhat wide
but should be tighter compared to what investors see in the
corresponding value ETF (also see
Australia ETFs: A Developed Market Play on Asian
Growth
).
The Bottom Line
So while RPG and RPV might cost a little more than their
counterparts-both in terms of expense ratios and bid ask
spreads-they arguably offer up a better exposure profile. They do
not suffer from the same 'double counting' that their non-pure
counterparts do, and thus could potentially be better picks for
investors seeking to truly play a growth or value style with
exchange-traded funds.
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@Eric
Dutram
on Twitter
Long XOM.
ALEXION PHARMA (ALXN): Free Stock Analysis
Report
ISHARS-SP500 VL (IVE): ETF Research Reports
ISHARS-SP500 GR (IVW): ETF Research Reports
GUGG-SP 500 PG (RPG): ETF Research Reports
GUGG-SP 500 PV (RPV): ETF Research Reports
WHIRLPOOL CORP (WHR): Free Stock Analysis
Report
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