Investors looking at the growth stock rout, particularly when it comes to the tech sector, may be wondering if the worst is over. Either way, to help mitigate risk, investors can opt for active management instead of trying to re-position a portfolio themselves.
An exodus from growth is seeing value pick up. It’s been a cyclical shift year in the making as growth stocks vastly outperformed their value counterparts following the financial crisis in 2008.
Enter the pandemic in 2020, and growth got an extra boost, particularly through household tech names that saw increased interest amid social distancing measures. Over the past couple of years, that run-up may have been the proverbial straw that broke the camel’s back with a tech rout thus far in 2022.
Consequently, growth names may have been pushed up to exorbitant levels with prices not justifying their fundamental valuations.
“[Growth companies] are exactly the companies that the market has awarded higher-than-average multiples because of outsized expectations of their growth prospects,” wrote GMO’s Ben Inker. “When those prospects deteriorate, valuations almost invariably fall significantly, [and] often precipitously.”
“What should be [noted by]all investors,” Inker added, “is that conditions today suggest that it is likely there will be more growth traps in the next year than there were in the last one, and there is good reason to believe their underperformance will remain worse than usual until a full unwinding of the growth bubble occurs.”
An Active Option in Growth
If there is more pain ahead for growth, investors will want to mitigate risk by being strategic. As such, they don’t have to completely abstain from the upside of growth, which can still be had with an active management strategy built into exchange traded funds (ETFs).
One fund to consider is the T. Rowe Price Growth Stock ETF (TGRW). With TGRW, investors can get exposure to household names in the tech sector and other growth opportunities while mitigating risk with the ability to adjust positions on the fly using active management.
In its attempt to provide long-term capital growth, TGRW invests in growth stocks with one or more of the following characteristics: strong cash flow and above-average earnings growth, the ability to sustain earnings momentum in economic downturns, occupation of a niche in the economy, and the ability to expand during times of slow economic growth. Additionally, TGRW can deliver this actively managed strategy with an expense ratio of only 0.52%.
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