The Rydex S&P 500 Pure Growth ETF (NYSEArca:RPG) aims to deliver a purer version of the garden-variety growth fund. With over $313 million in assets and five years of return history, RPG has established itself as a viable choice for those wanting âgrowthierâ growth, as Carolyn Hill touched on in her recent blog.
Over the past five years, RPG returned 34.3 percent, or almost twice that of another popular growth fund, the iShares S&P 500 Growth Index Fund (NYSEArca:IVW), which rose 16.2 percent.
The idea behind RPG is simple. Most style funds split their pool of stocks into growth or value, meaning every stock gets assigned to one or the other.
The stocks that live in the middle of the style continuum have their weight split between the two style buckets. Effectively these fence-sitting stocks are both growth and value. An individual stock might be assigned to 60 percent in growth and 40 percent in value, for example.
RPG dispenses with middle-of-the-road stocks altogether. Instead it holds only those companies that exhibit the âtrueâ growth characteristics, as defined by its methodology.
In some ways, RPGâs approach seems intuitive and unremarkable. After all, the ubiquitous style box visually suggests this type of arrangement, even though itâs not the norm for popular growth funds like IVW.
The Usual Suspects
Funds that stray off the beaten path to deliver high returns often use higher-beta and smaller-cap stocks to get there. Letâs look at RPG along these lines, again using IVW as a reference.
First, does pure growth mean higher beta?
In this case, the answer may be yes. I looked at five years of returns (NAV total return), comparing RPG and IVW, respectively, to the S&P 500. I used the broad-based iShares S&P 500 Index Fund (NYSEArca:IVV) as an investable proxy for the S&P.
For the five-year period, RPGâs beta was 1.05 compared with IVWâs 0.94.
This means RPG lives a bit further out on the risk/return continuum, at least according to this set of data points. In other words, youâll take more risk for the extra growth, which is just fine as long as you realize what youâre getting into. A graph of year-to-date returnsâwith higher highs and lower lowsâmakes RPGâs higher beta easier to see.
I spoke about the stock-selection process above, but the difference in stock weighting is more striking, in my view. Letâs check out the top holdings in RPG and IVW.
The differences in top holdings underscore the small-cap tilt thatâs built into RPG. Most telling is how RPGâs top holdings map over to IVW. Priceline, RPGâs top holding, is 65 th in IVWâs holdings. And Chipotle is 155 th .
The weighted average of the market cap of stocks in the fund measures this small-cap tilt directly. RPGâs weighted average market cap is $27.4 billion to IVWâs $86.6 billion, according to Bloomberg. Thatâs a huge difference. It means the average firm in RPG is about a third the size of those in IVW.
In sum, while both funds pull from the S&P 500, RPG gives the smaller-cap stocks it choosesâlike Chipotleâa much higher weighting than IVW. Smaller-cap stocks are generally riskier, hence the higher beta.
RPG certainly looks âgrowthier,â using the price-to-earnings ratio. RPGâs P/E is 16.8 compared with 14.8 for IVW.
Also, RPGâs 27 percent turnoverâa measure of how long the stocks stay in the portfolioâis only moderately higher than IVWâs 22 percent. Sometimes funds using alternative methods show high turnover, but not here.
Lastly, RPGâs annual expense ratio is almost twice as much as IVWâs, at 0.35 percent vs. 0.18 percent, respectively. The difference may reflect RPGâs higher costs for buying and selling its smaller-cap underlying stocks.
I happen to like the pure-growth story. That RPG keeps a mature firm such as Microsoft out of the limelight makes sense to me. But investors may need a bit of extra fortitude to reach for a higher-beta fund like RPG when triple-digit dips in the Dow are all too common.
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