Hundreds of exchange traded funds provide investors with dedicated exposure to growth or value stocks, but in this corner of the ETF space, methodology truly matters.
That is to say that investors who opt to use index-based strategies for accessing either type of stock should take the time to examine how an ETF’s underlying benchmark works. That small amount of homework can lead to big, potentially positive differences when it comes to total returns.
Take the cases of the Invesco S&P 500 Pure Growth ETF (RPG) and the Invesco S&P 500 Pure Value ETF (RPV). RPG and RPV follow the S&P 500® Pure Growth Index and the S&P 500® Pure Value Index, respectively, and those are different beasts than the traditional S&P 500 Growth and Value benchmarks.
In some cases, “companies can be found in both growth and value indices, whereas there is no overlap between the pure growth and pure value indices. The pure style baskets also contain fewer constituents than their style counterparts, reflecting a more selective approach to style exposures,” noted S&P Dow Jones Indices.
In the case of RPG, the growth ETF, its index takes into consideration factors such as three-year sales growth, changes in earnings per share (EPS) over the same period, and momentum. RPV’s underlying benchmark does the same. In both cases, the end products available to investors ensure they are getting pure approaches to growth and value.
The differences offered by RPG and RPV are material. For the three years ending February 7, RPV beat the S&P 500 Value Index by 650 basis points. During the same period, RPG lagged the S&P 500 Growth Index due in large part to that ETF not featuring large weights to mega-cap growth stocks.
In fact, the weights assigned to holdings in RPG and RPV confirm that single-stock risk is mostly benign in the ETFs. RPV’s largest holding commands a weight of just 3.55%, while RPG’s biggest component garners an allocation of just 3.04%.
Indeed, RPG and RPV have compelling attributes for long-term investors, including the point that the funds’ indexes are rarely beaten by active managers employing comparable strategies.
“S&P Pure Style Indices typically outperformed their S&P Style Index counterparts in months when their style was in favor. Based on data since 1997, S&P Pure Style Indices posted higher average monthly total returns than S&P Style Indices when their style outperformed,” concluded S&P Dow Jones Indices.
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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.
