Exchange traded funds that are dedicated to the growth or momentum factor are, in some instance, being ignored by investors opting to focus on value funds.
While the merits of the value trade being crowded can be debated, a relative lack of enthusiasm for growth could be a contrarian signal to embrace growth ETFs.
Dating back to last year, investors have been favoring exchange traded funds dedicated to the value factor over those ETFs offering exposure to the growth factor. That theme is continuing in 2017 and it is prompting some departures from a well-known growth ETF. A good place to start the search for growth ETFs is the ultra-cheap Schwab U.S. Large-Cap Growth ETF (NYSEArca: SCHG).
Cyclical stocks, like materials, industrials, energy and technology companies, are more economically sensitive and do well when the economy is improving. With the Federal Reserve set to hike rates, the rising rate environment would signal a better economic outlook. As is the case with many growth ETFs, SCHG is highly cyclical at the sector level.
“SCHG, which tracks the Dow Jones U.S. Large Cap Growth Total Stock Market Index, is home to nearly 430 stocks. As is the case with value ETFs, growth funds are often dominated by two sectors. While energy and financials dominate value funds, consumer discretionary and technology stocks often loom large in growth funds. SCHG reflects that theme as technology and consumer cyclical names combine for almost 47% of the ETF’s weight,” according to Investopedia.
Value stocks typically trade at cheaper prices relative to fundamental measures of value, such as earnings and the book value of assets. In contrast, growth stocks tend to run at higher valuations since investors expect the rapid growth in those company measures.
Investors are typically more aggressive during periods of heightened volatility and would chase popular growth stocks. Since growth stocks show high multiples, investors may expect that the companies will sustain a high growth rate.
“The Schwab U.S. Large-Cap Growth ETF is one of the growth ETFs that ascended to a new high Tuesday and it is one of a small amount of growth ETFs to see robust inflows to start 2017. Year-to-date, investors have funneled nearly $144 million into SCHG,” adds Investopedia.
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