What's Inside Popular Growth and Value ETFs Is Not Static

In 2023, investing in growth was highly rewarding. We all heard about the Magnificent Seven Stocks that kept climbing higher throughout the year. Such gains helped the Vanguard Growth ETF (VUG) and the iShares Russell 1000 Growth ETF (IWF) rise 47% and 43%, respectively, for the year. However, the iShares S&P 500 Growth ETF (IVW) increased only 30%. The performance differences stem from what was inside the funds, not the cost differences. 

As we wrote about a year ago, IVW added some mega-cap energy and healthcare companies historically seen as part of the value style. Those included top-10 holdings ChevronExxon Mobil, and UnitedHealth Group. Meanwhile, IVW removed some previously prominent growth companies like Meta Platforms. 

Index Construction Matters 

Annually, in late December, the S&P 500 style index-based ETFs undergo a rebalance and reconstitution process. In addition to scoring all S&P 500 constituents for three-year sales and earnings per share growth rates, the growth factor includes a 12-month price momentum metric. As a result of the latest annual review, what is now inside the broad growth and value style ETFs are significantly different from what they were a year ago. 

The iShares S&P 500 Growth ETF (IVW) recently had approximately $37 billion in assets, the largest of the S&P 500 Growth-based ETFs ahead of products from iShares and State Street Global Advisors. Late last month, IVW sold some mega-cap energy and healthcare companies while adding to its stakes in information technology, consumer discretionary, and communications services. Index investing is not static.  

Indeed, stakes in the communications (12% today vs. 6.6% a year ago), consumer discretionary (15%, 9.6%, and information technology sectors (47%, 34%) were boosted. In contrast, energy (1.7%, 7.9%) and healthcare (7.0%, 21%) were reduced sharply. 

Traditional Growth Stocks Inside a Value ETF  

The inverse occurred for the iShares S&P 500 Value ETF (IVE), a $27 billion slow and steady version of the IVW racehorse. Chevron, Exxon Mobil, and Johnson & Johnson were back inside IVE, replacing Amazon.com, Meta Platforms, and Microsoft. S&P-style indexes stocks can be both growth and value constituents if they score favorably. 

From a sector perspective, information technology was no longer IVE’s second largest sector, falling to fifth. The sector weight of 8.4% was cut in half from 17%. Meanwhile, energy and healthcare stakes were boosted to 6.4% and 19%, respectively, from 1.6% and 9.4% a year ago. 

While there are security-level differences, IVW looks to me a lot more like IWF and VUG to start 2024 from a sector perspective.  

Past performance is not indicative of future results because the market environment changes. In 2023, as the Fed was hiking interest rates, faster-growing companies shined. With expectations of multiple rate cuts in 2024, sentiment could easily shift. Dividend-paying, lower-priced stocks may be the better alternative.  

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