Go With Equal-Weight ETFs to Split Growth/Value Difference | ETF Trends

On a year-to-date basis, value stocks and the related exchange traded funds are easily outperforming their growth rivals.

However, correlations between the two styles are increasing, and that could be a sign that growth and value could trade sideways or in lockstep with one another going forward. Rather than isolating growth or value, investors can access both with equal-weight ETFs, such as the Invesco S&P 500 Equal Weight ETF (RSP).

“In the current, angst-ridden equity investment environment, we believe Stability represents a more attractive attribute than either Growth or Value,” wrote Goldman Sachs equity strategist David Kostin in a Sunday note. “Stocks with stable growth and low share price volatility typically outperform as GDP slows and (the financial conditions index) tightens but currently trade at undemanding valuations.”

An oft-cited critique of broad market equal-weight strategies such as RSP is that these products lean into value to generate out-performance of cap-weighted rivals. Indeed, RSP allocates about 37% of its weight to stocks with the value label.

That said, the Invesco ETF isn’t bereft of growth, as growth stocks represent about 20% of the fund’s roster. The remainder of RSP’s 506 holdings are considered blend equities, confirming that the equal-weight ETF does an admiral job of splitting the growth/value proposition, and that could be a positive attribute over the near term, particularly because it could take some time for growth stocks to regain the bullishness seen over the prior decade.

“The resumption of sustained Growth stock outperformance will require investors to gain confidence that the economy will slow but avoid a recession and that inflation will soften enough to reduce the need for dramatic further FCI tightening,” notes Kostin. “Such and outcome is possible but equity investors are skeptical the Fed can achieve these objectives without causing a recession in 2023. Growth stocks will struggle to outperform until the uncertainty diminishes.”

Indeed, RSP’s deeper value tilt is benefiting investors this year, as the fund is beating cap-weighted S&P 500 ETFs by about 410 basis points. Additionally, growth and value are increasingly correlated, potentially confirming the utility of RSP for the remainder of 2022.

“The correlation of Growth vs. Value with the S&P 500 (SP500) (NYSEARCA:SPY) during the last three months has been the strongest in 20 years outside of the 2001 Tech Bubble unwind,” concludes Goldman’s Kostin. “This correlation can likely be explained by the large weights of Growth stocks in the S&P 500, the current popularity of Growth stocks among many investors, and the importance of Fed policy and interest rates in driving both Growth/Value rotations and overall equity market returns.”

For more news, information, and strategy, visit the Portfolio Strategies 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.