Slower Economy Could Benefit Growth ETFs | ETF Trends

ETFs dedicated to growth stocks, such as the SPDR Portfolio S&P 500 Growth ETF (NYSEArca: SPYG), could be solid ideas for investors as economic activity slows. While that notion may be a surprise to some investors, history shows a slowing economy can benefit growth ETFs over their value counterparts.

“U.S. economic growth has been decelerating since late last year, as have the consensus estimates for U.S. companies’ revenue growth. This has historically been good news for growth stocks, not value,” reports Evie Liu for Barron’s.

The $4.18 billion SPYG follows the S&P 500 Growth Index. That index “contains stocks that exhibit the strongest growth characteristics based on: sales growth, earnings change to price ratio, and momentum,” according to State Street.

Past eras of slow economic growth serve as reminders of the benefits of growth stocks during sluggish economic conditions.

“Since 2011, when U.S. economic growth—measured by Goldman Sachs’ Current Activity Indicator (CAI)—has slowed by more than 0.5 percentage point in a month, the bank’s internal basket of high-growth stocks—50 S&P 500 companies with the fastest expected 2019 sales growth within their respective sectors—has produced a median excess return of 0.35 percentage points a month compared with the S&P 500,” according to Barron’s.

More Growth Ideas

Other growth ETFs include the iShares Russell 1000 Growth ETF (NYSEArca: IWF) and Vanguard Growth ETF (NYSEArca: VUG). IWF takes growth picks from the large-cap universe of Russell 1000 stocks. VUG selects picks from the largest 85th percentile of the U.S. stocks.

Investors can still enhance their portfolios as the bull market extends with growth-oriented stocks that continue to perform despite the recent bouts of volatility. The growth style has outperformed the market in spite of being prone to sell-offs with strong corporate earnings.

With the yield curve flattening, growth stocks could renew their out-performance over value names.

“A flat yield curve will negatively impact companies in the financial sector, because some of their profits come from borrowing short-term bonds and lending long-term ones to harvest the rate gap in between. Since the financial sector makes up a large portion of value stocks, value is likely to see a drag relative to growth,” reports Barron’s.

SPYG allocates 25.62% of its weight to technology stocks and a combined 26.77% of its weight to the communication services and consumer discretionary sectors.

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