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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 - ETF report) and the iShares S&P 500 Value ETF (IVE - ETF report).
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:
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 - Analyst Report), 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.
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 - Analyst Report), 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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