Growth
ETFs
are funds that hold high-growth companies. High growth companies
prioritize speedy revenue growth and earnings growth over regular
and reliable dividend payments to shareholders. The thinking is
that growth companies that retain and invest their earnings will
do better over the longer term than companies who pay out those
earnings to shareholders.
How have growth ETFs performed recently? The chart below
compares the performance of growth to value. The iShares Russell
Growth Index (
IWF
)is a fund that prioritizes earnings growth. The iShares Russell
1000 Value Index (
IWD
) is a value fund which prioritizes dividends.
Growth is winning. IWF is beating IWD. As the chart shows, the
two traded fairly closely through October 2010, when growth fund
IWF pulled ahead. This timing is not coincidental. In October a
stronger market began to ameliorate investor concern about the
continued growth of the domestic economy.
One way to measure investor concern about market direction is
the movement volatility index or VIX, which tracks the price of
options on the ubiquitous S&P 500 Index. Investors use put
options on the S&P 500 Index to protect against losses. If
these options are expensive this suggests that investors are
willing to pay up to protect portfolios. The chart below shows
the iPath S&P 500 VIX Mid-Term Futures ETN (
VXZ
), which tracks the VIX.
The chart shows that the VIX see-sawed through September.
Looking at the chart, in October, the VXZ, proxy for the VIX,
registered a discernable direction of decline. This coincides
roughly to the time when growth began to outperform value. The
outperformance of IWF and the decline in the VIX reflects
investors then new resolve to shake off worry of a double-dip
recession. In November the Federal Reserve announced its bond
buying program, known as QE2. The trend reinforced and
strengthened.
Growth ETFs tend to be higher beta than value funds. This
means that in strong markets they typically outperform the
benchmark. In weaker markets they tend to underperform. Growth is
outperforming value across market capitalization. The chart below
compares the returns of a smaller cap growth fund, iShares
Russell 3000 Growth ETF (NYSEArca:IWZ) with a smaller cap value
fund, iShares Russell 3000 Value ETF (NYSEArca:IWW)
Although strong earnings are important to classifying a
company as a growth stock and dividends are important to
classifying a company as a value, there are no strict
definitions. An individual company can be expressed as either a
growth or a value stock. Holdings in growth and value funds
overlap. Oil major Exxon Mobile (NYSEArca:XOM) for example is the
largest holding in both IWF and IWD shown in the first chart
above.
Growth ETFs tend to have more exposure to the technology
sector, less to industrials and financials. Historically, strong
technology performance is another predictor of the relative
strength of growth funds. In the 1990s technology outperformed
the broad market. Growth beat value. At the height of the tech
bubble, the P/E ratios of growth funds were twice that of value
funds. Over the last decade, the PE ratio of technology companies
contracted. Value outperformed growth.
A general slowdown in the U.S. equity markets over the past
decade and the trend to lower interest rates has helped value to
outperform. Growth ETFs typically pay lower dividends (IWD's
dividend is currently 50% higher than IWF). Although this amounts
to about 100 basis points, the certainty counts. In a slow growth
environment of low interest rates, every basis point counts.
The stubborn underperformance of growth over the last decade
recalls research by Fama and French published in the mid 1990s.
In a famous study Fama and French panned growth stocks. They
suggested that growth over the longer term delivers lower returns
at higher risk than value funds. (They also singled out small cap
growth as an especially unwelcome asset class, both volatile and
low performing.) Ironically, no sooner than they finished their
study, growth stocks when on an extended run, far outperforming
value.
There a many types of growth ETFs, including fundamental
funds, leverage funds and short ETFs that are useful for traders.
The plain vanilla growth funds are differentiated primarily in
terms of the market cap size of their holdings and their exposure
to small companies. Growth investors who wish to overweight a
range of certain sized growth companies should find an ETF that
matches that range. The list below presents traditional growth
ETFs, the company size targeted in their holdings, as well as
their fees:
Traditional "Plain Vanilla" Growth ETFs
iShares Russell 1000 Growth ETF (NYSEArca:IWF): 1000 largest
firms, 0.20%
iShares Russell 2000 Growth ETF (NYSEArca:IWO): 1001-2000
largest firms, 0.25%
iShares Russell 3000 Growth ETF (NYSEArca:IWZ): 3000 largest
firms, 0.25%
iShares Russell Midcap Growth ETF (NYSEArca:IWP): 201-1000
largest firms., 0.25%
iShares S&P 500 Growth ETF (NYSEArca:IVW): 500 largest
firms, 0.18%
iShares S&P MidCap 400 Growth ETF (NYSEArca:IJK): 501 to
900 largest, 0.25%
iShares S&P SmallCap 600 Growth Index Fund (
IJT
): 901 to 1500 largest, 0.25%
SPDR Dow Jones Wilshire Large Cap Growth ETF (NYSEArca:SPYG):
largest 500, 0.20%
SPDR Dow Jones Wilshire Mid Cap Growth ETF (NYSEArca:MDYG):
501-1000 largest, 0.25%
SPDR S&P 600 Small Cap Growth ETF (NYSEArac:SLYG):
751-2500 largest, 0.25%
Vanguard Growth ETF (NYSEArca:VUG): 750 largest firms,
0.12%
Vanguard Mega Cap 300 Growth ETF (NYSEArca:MGK): 300 largest
firms, 0.13%
Vanguard Mid-Cap Growth ETF (NYSEArca:VOT): 301-750 largest
firms, 0.13%
Vanguard Small-Cap Growth ETF (
VBK
): 751-1750 largest, 0.12%
Rydex S&P 500 Pure Growth ETF (NYSEArca:RPG), 500 largest
firms, 0.35%
Rydex S&P MidCap 400 Pure Growth ETF (NYSEArca:RFG),
501-900 largest, 0.35%
Rydex S&P SmallCap 600 Pure Growth ETF (NYSEArca:RZG),
901-1500 largest, 0.35%
iShares Morningstar Large Growth Index Fund (NYSEArca:JKE),
0.25%
iShares Morningstar Mid Growth Index Fund (NYSEArca:JKH),
0.30%
iShares Morningstar Small Growth Index Fund (NYSEArca:JKK),
0.30%
PowerShares Autonomic Balanced Growth NFA Global Asset
Portfolio ETF (NYSEArca:PAO), 0.25%
PowerShares Autonomic Growth NFA Global Asset Portfolio ETF
(NYSEArca:PTO), 0.25%
Fundamental Growth ETFs
There are also several ETFs based on proprietary enhanced or
fundamental indexes. Fees are higher.
First Trust Large Cap Growth Opportunities AlphaDEX Fund
(NYSEArca:FTC), 0.7%
Powershares Dynamic Large Cap Growth Portfolio ETF
(NYSEArca:PWB), 0.61%
Powershares Dynamic Mid Cap Growth Portfolio ETF
(NYSEArca:PWJ), 0.63%
Powershares Dynamic Small Cap Growth Portfolio ETF
(NYSEArca:PWT), 0.63%
And finally, short and leverage growth ETFs suitable for
speculative traders looking for a short-term play:
Short/Leverage Growth ETFs
ProShares Ultra Russell 1000 Growth ETF (NYSEArca:UKF),
0.95%
ProShares Ultra Russell 2000 Growth ETF (NYSEArca:UKK),
0.95%
ProShares Ultra Russell MidCap Growth ETF (NYSEArca:UKW),
0.95%
ProShares UltraShort Russell 1000 Growth ETF (NYSEArca:SFK),
0.95%
ProShares UltraShort Russell 2000 Growth ETF (NYSEArca:SKK),
0.95%
ProShares UltraShort Russell MidCap Growth ETF (NYSEArca:SDK),
0.95%
Jonathan
Bernstein
has been writing about ETFs since 2003 and is the author of
Sector Trading: A Year in Exchange Traded
Funds
.