Sector Exposures Matter in Growth, Value ETFs

Sector exposures always matter with equity-based exchange traded funds and that is particularly true of factor-driven strategies, such as growth and value.

Factor ETFs typically feature different sector allocations than broad market benchmarks, such as the S&P 500, and those sector exposures are critical determinants of factor performances. For example, growth ETFs, such as the iShares S&P 500 Value ETF (NYSEArca: IVE), often feature substantial exposure to financial stocks. IVE tracks the S&P 500 Value Index.

Conversely, growth ETFs, such as the iShares S&P 500 Growth ETF (NYSEArca: IVW), usually feature large allocations to the technology sector. IVW targets the S&P 500 Growth Index. Technology’s long out-performance of financials explains why growth has been easily topping value for about a decade.

“Although the trend remains intact so far in 2018, a recent uptick in volatility left many investors wondering if value might be in line for a comeback,” said S&P Dow Jones Indices in a recent note. “Indeed, value outperformed in October and November as many growth-oriented stocks came under pressure from investors looking to take risk off the table.  While it remains to be seen if this nascent trend is here to stay, historical sector exposures may be useful for assessing the relative prospects of growth and value.”

History Matters

For more than two decades, technology has been the largest sector weight in the S&P 500 Growth Index while financials have been the largest sector exposure in the value benchmark.

“This result held across all three time frames, capturing 1) the run-up to the height of the Tech bubble (Jan. 1995 to Mar. 2000); 2) the subsequent bursting of that bubble and the run-up to the Global Financial Crisis (Apr. 2000 to Dec. 2007); and 3) the Global Financial Crisis and the most recent bull market in U.S. equities (Jan. 2008 to Nov. 2018),” said S&P Dow Jones.

Currently, IVW allocates 31.52% of its weight to technology, or more than 1,300 basis points above its second-largest sector weight. IVE, the value ETF, has a 22.31% weight to financial services names, or more than 1,000 basis points above its second-largest sector weight.

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