Growth stocks and the related exchange traded funds are faltering this year. Some are close to or already in bear markets. Blame inflation and rising interest rates, among other factors.
However, there remain solid ideas for accessing growth stocks, particularly with some discounts permeating the space. In other words, growth at a reasonable price (GARP) is a valid strategy today. Enter the Barron’s 400 ETF (NYSEArca: BFOR).
BFOR follows the Barron’s 400 Index (B400) and emphasizes the virtues of GARP investing. That could serve investors in the current market setting.
“Outside of leaning into energy and other natural resource names, investors should give a second look to some of the highly profitable growth names, particularly those that are now trading at more reasonable valuations,” says BlackRock’s Russ Koesterich in a recent note. “With economic growth likely to slow and earnings growth harder to come by, companies able to grow earnings should garner renewed interest. Specifically, I would focus on the cheaper segment of growth, otherwise known as GARP.”
BFOR is sector-agnostic — its focus is GARP, and if an overweight or two to particular sectors comes about, that’s likely the result of that group’s GARP credentials. To BlackRock’s point about natural resources stocks, BFOR allocates 18.5% of its weight to energy and materials names, and that is overweight to those sectors relative to broader benchmarks.
Enhancing the case for BFOR in this climate is the point that stocks with strong GARP credentials are holding up somewhat against a trying backdrop.
“Avoiding volatility has been a winning strategy, but with interest rates surging growth stocks have continued to struggle. GARP names have performed in-line with the market, outperforming momentum, quality, and pure growth but trailing value,” adds BlackRock.
Helped by lower weights to technology and communication services stocks, BFOR is handily outperforming large- and mid-cap growth indexes this year. The ETF could continue proving somewhat more steady than basic equity strategies because many of its holdings are profitable companies, which is a coveted trait in this environment.
“As economic growth slows, consistent earnings are harder to come by and the growth premium may start to rise again. While investors have understandably eschewed overpriced growth names, growth’s unusually high pandemic premium versus value has dissipated. Going forward, investors should revisit profitable growth stocks where valuations are more reasonable,” concludes BlackRock.
Alternatives to BFOR in the mid-cap growth space include the iShares Russell Midcap Growth ETF (NYSEARCA: IWP), the First Trust Mid Cap Growth AlphaDEX Fund (NasdaqGM: FNY), and the iShares Morningstar Mid Growth ETF (NYSEArca: JKH).
For more news, information, and strategy, visit the ETF Building Blocks Channel.
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.