The SPDR Portfolio S&P 500 Growth ETF (NYSEArca: SPYG) is a basic approach to growth stocks and one that’s serving investors as highlighted by a year-to-date gain of 11.62%.
SPYG, which tracks the S&P 500 Growth Index, and rival growth ETFs can actually perform well late in the business cycle. Investors can still enhance their portfolios as the bull market extends with growth-oriented stocks that continue to perform despite the recent bouts of volatility. The growth style has outperformed the market in spite of being prone to sell-offs with strong corporate earnings.
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.
“There are many reasons why value stocks have lagged behind. Much of the phenomenon reflects the ultra-low interest rates that have prevailed since the global financial crisis. Lower rates make investing in growth stocks more attractive,” writes Ronald Chan for Bloomberg. “At the same time, they hurt financial companies by compressing their net interest margins — the difference between the rates at which they can borrow and lend. This has depressed returns in a sector that’s come to make up a substantial chunk of the value universe, defined by stocks with low multiples of price to earnings, book value, or other measures.”
Growth Dominance Can Continue
Growth stocks may be seen as exorbitant and overvalued, causing some investors to favor value stocks, 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). While they generally have solid fundamentals, value stocks may have lost popularity in the market and are considered bargain priced compared with their competitors.
When we are in a slow down or a contraction, the growth, large-cap, and defensive categories outperformed as they provide more diversified businesses and showed lower fixed costs to help them weather economic storms.
The $8.42 billion SPYG is home to 279 stocks with Apple and Microsoft combining for almost 20% of the fund”s weight. SPYG devotes nearly 55% of its weight to the technology and consumer discretionary sectors.
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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.