Investors are often led to believe that accessing growth stocks means paying up, but the Invesco S&P 500 GARP ETF (NYSEArca: SPGP) proves that’s not always necessary.
SPGP seeks to track the investment results of the S&P 500® GARP Index. Strictly in accordance with its guidelines and mandated procedures, the index provider compiles, maintains and calculates the underlying index, which is designed to track the performance of approximately 75 growth stocks in the S&P 500® Index that exhibit quality characteristics and have attractive valuation.
Recent performance indicates SPGP is a sturdy idea to consider right now.
“During the past one-year period, the S&P 500 GARP Index outperformed the S&P 500 and other selected single-factor indices by a wide margin. For the overall post-launch two-year period, the S&P 500 GARP Index again outperformed the S&P 500 and other selected single-factor indices, with the exception of the S&P 500 Pure Growth,” according to S&P Dow Jones Indices.
GARP: Sizing up the SPGP ETF
Growth stocks are often associated with high-quality, prosperous companies whose earnings are expected to continue increasing at an above-average rate relative to the market. Growth stocks generally have high price-to-earnings (P/E) ratios and high price-to-book ratios. Still, data suggest the growth/value premium isn’t overly elevated relative to historical norms.
The performance of SPGP’s underlying index is not “surprising given recent market development. First, with the vaccination rollout and decrease in new COVID-19 cases, investors expect real economic recovery on the horizon. Second, as yields of longer-term U.S. government bonds tick up, investors may start to rotate out of expensive growth stocks and favor value companies,” according to S&P Dow Jones.
Growth stock ETFs may be seen as exorbitant and overvalued, causing some investors to favor value stock ETFs, which are considered undervalued by the market. Value stocks tend to trade at a lower price relative to their fundamentals (including dividends, earnings, and sales).
“Aiming to balance pure growth and pure valuation exposures, the S&P 500 GARP Index selects growth stocks with relatively high quality at a reasonable price,” adds S&P. “Factor exposure analysis shows that the index’s multi-factor sequential filtering approach achieves its design objective. Moreover, during the post-launch period, the GARP strategy had better returns than the S&P 500 and other relevant single-factor indices, except the S&P 500 Pure Growth. The current market environment may present an opportunity for investors to consider the S&P 500 GARP Index as they diversify away from expensive pure growth stocks.”
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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.