Growth stocks have powered the U.S. equity rally this year, but this segment of the market is looking pricey and comes with greater risks. Investors may consider a shift to the value style and related exchange traded funds.
“Most investors are looking for diversification to make sure their portfolios have the unique risk/reward characteristics required to meet their investing goals. We believe the concentration risk in the market is a risk many investors are currently taking; it is a risky bet or gamble on prices going higher than the next dollar invested. Both the S&P 500 Index and Russell 1000 Growth Index are currently far from diversified in our opinion,” Tracy Fielder, Product Management Director and Co-Lead for Invesco, said in a research note.
“Now may be the time to consider reviewing your portfolio to ensure you are “truly” diversified. By doing so, you will follow the simple advice that is so difficult for many of us to adhere to – in order to buy something low, you must be willing to sell something high,” he added.
Fielder warned investors that no cycle lasts forever as part of a long-term investment horizon. Consequently, we should understand investing cycles, which suggest that after significant outperformance over an extended period, by definition, investments become more prone to drawdowns versus further upside. As a way to create true diversification, parts of one’s investment portfolio will be lagging while others outperform.
As a way to diversify a growth-heavy portfolio, investors may consider value-oriented ETF strategies. For example, the Invesco Dynamic Large Cap Value ETF (PWV) tracks the Dynamic Large Cap Value Intellidex Index, which is composed of large-capitalization U.S. value stocks that the Intellidex Provider includes principally on the basis of their capital appreciation potential.
Additionally, the Invesco S&P 500 Value ETF (NYSEArca: SPVU) tracks the S&P 500 Enhanced Value Index, which focuses on 100 S&P 500 companies with the greatest value score calculated based on fundamental ratios of a company’s book value-to-price ratio, earnings-to-price ratio and sales-to-price ratio.
Lastly, the Invesco S&P 500 Value With Momentum Portfolio (BATS: SPVM) follows the S&P 500 High Momentum Value Index, which tracks the performance of stocks in the S&P 500 Index that have the highest value and momentum score. Constituents are selected through a two-step process: first, the 200 stocks with the highest value scores; second, 100 securities with the highest positive momentum scores.
For more news and information, visit the Innovative ETFs Channel.