The growth factor is one of this year’s best-performing investment factors, a theme that is helping some growth exchange traded funds race to new records. That includes the SPDR S&P 500 Growth ETF (NYSEArca: SPYG).
The growth style, though, may be gaining momentum as investors turned to upbeat economic and earnings data, causing many to adopt a more risk-on attitude. Since growth stocks show high multiples, investors may expect that the companies will sustain a high growth rate. In contrast, traders may feel that firms with low multiples would continue to experience tepid growth.
SPYG, which hit another all-time high Monday, is up 14.6% year-to-date. The ETF tracks the S&P 500 Growth Index and is one of the oldest ETFs dedicated to the growth factor with its 17th birthday looming later this year.
SPYG’s underlying index “contains stocks that exhibit the strongest growth characteristics based on: sales growth, earnings change to price ratio, and momentum,” according to State Street Global Advisors (SSgA). The ETF “seeks to exposure to S&P 500 companies that display the strongest growth characteristics.”
Investors can also target growth-specific index ETFs, like the iShares Russell 1000 Growth ETF (NYSEArca: IWF) and Vanguard Growth ETF (NYSEArca: VUG). IWF takes growth picks from the large-cap universe of Russell 1000 stocks. VUG selects picks from the largest 85th percentile of the U.S. stocks. The ETFs overweight tech and discretionary names as well.
Cyclical stocks, like materials, industrials, energy and technology companies, are more economically sensitive and do well when the economy is improving. With the Federal Reserve set to hike rates, the rising rate environment would signal a better economic outlook. As is the case with many growth ETFs, SPYG has a hefty cyclical tilt.
Traditional growth funds, including ETFs, are usually heavily allocated to two sectors: Technology and consumer discretionary. SPYG follows suit as those sectors combine for about 52.7% of the ETF’s weight. Eight of the ETF’s top 10 holdings hail from those two sectors. That group includes Apple Inc. (NASDAQ: AAPL) and Amazon.com Inc. (NASDAQ: AMZN).
Value stocks typically trade at cheaper prices relative to fundamental measures of value, such as earnings and the book value of assets. In contrast, growth stocks tend to run at higher valuations since investors expect the rapid growth in those company measures.
SPYG, which holds nearly 330 stocks, is a cost-effective ETF. The ETF’s annual fee is just 0.15%, or $15 on a $10,000 investment.
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Tom Lydon’s clients own shares of Apple.