One of the primary takeaways through the first month and change of 2022 is that market participants are displaying little tolerance for high-growth companies that aren’t profitable and lack other quality characteristics.
However, investors could display a preference for quality growth companies as 2022 moves along. The American Century STOXX U.S. Quality Growth ETF (NYSEArca: QGRO) is an avenue for accessing the alluring combination of growth and quality.
QGRO, which follows the iSTOXX® American Century® USA Quality Growth Index, emphasizes large- and mega-cap companies. That could be to investors’ liking because in the growth segment of the market, it’s those types of companies that sport quality traits, and that leads to QGRO holdings usually being less volatile than small, unprofitable growth fare.
Following recent declines by growth stocks across the board, some QGRO components may be offering rare valuation opportunities, further bolstering the case for the ETF.
“With headlines focused on inflation and the Federal Reserve, rotations between growth and value stocks have become increasingly violent. Near term this is likely to continue. While skilled market timers may try to get ahead of these moves, a different strategy is to embrace the middle: growth at a reasonable price, known as GARP,” according to BlackRock research.
QGRO allocates 41% of its weight to technology stocks. While that’s overweight relative to broader benchmarks and even many growth funds, some of the fund’s tech holdings have recently come down in valuation. Additionally, QGRO doesn’t allocate more than 2.73% of its weight to any of its 203 holdings, meaning that even if valuations spike in the tech sector, the ETF isn’t at risk of becoming overvalued.
QGRO also allocates a combined 38% of its weight to the consumer discretionary and healthcare sectors, which are two groups that currently have some attractive multiples. Additionally, healthcare (excluding high-growth, speculative, unprofitable fare) is home to an assortment of quality companies.
Another point in favor of QGRO is that quality and low volatility are two distinct investment factors, the latter can often be a byproduct of the former, indicating that QGRO is a possible avenue for investors looking to mitigate broader market volatility.
“Since last March, regardless of the style currently in vogue, high beta – stocks that exhibit greater volatility than the market at large — low quality names have generally underperformed. Interestingly, these high beta names are most visible at both extremes of the value/growth spectrum. In other words, deep value as well as early or speculative growth tend to be high beta,” concludes BlackRock.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
