Beat The Market With Pure Style ETFs
Zacks Investment Research | Nov 09, 2018 03:50AM ET
- (0:Podcast@Zacks.com
In this episode of ETF Spotlight, I talked with Nick Kalivas, Senior Equity Product Strategist at Invesco.
Most investors are familiar with traditional growth and value investment styles. Pure styles offer focused approach to growth and value style investing by eliminating stocks with overlapping characteristics.
These indexes define about one fourth of S&P 500 stocks with strongest growth characteristics as “pure growth” and one fourth as “pure value.” These two buckets have no overlapping stocks. Index constituents are then weighted by their style scores.
Nick explained how stocks are selected and weighted in these pure style indexes, which can be seen as second-generation style approaches.
I looked at the performance of the Invesco S&P 500 Pure Growth ETF (AX:RPG) and Invesco S&P 500 Pure Value ETF RPV over the past ten years. Both RPV and RPG have significantly outperformed the S&P 500 index.
(Chart source: StockCharts.com)
Superior performance of these approaches can primarily be attributed to a combination of sector allocation and stock selection process. Find out more on the podcast.
RPG currently has highest exposure to Technology (37%) and Healthcare (23%) sectors. Its top holdings include Netflix (NASDAQ:NFLX) , Adobe (NASDAQ:ADBE) and Red Hat (NYSE:RHT) . Unlike market cap weighted S&P 500 growth ETFs, which are dominated by Apple (NASDAQ:AAPL) , Microsoft (NASDAQ:MSFT) and Amazon (NASDAQ:AMZN) , RPG provides more diversified exposure.
RPV allocates about 26% to Financials and 19% to Consumer Discretionary sectors. Its top holdings include CenturyLink (NYSE:CTL) , Kohl's (NYSE:KSS) and Berkshire Hathaway BRK.B .
In fact, holding these two ETFs together and rebalancing semiannually, would result in outperformance over the S&P 500 index. The portfolio would likely have higher volatility but better risk-adjusted returns than SPY (NYSE:SPY). Please listen to the podcast to learn more.
We also discussed how pure growth and value perform well at different times and the correlations between the two. How should investors use these strategies in their portfolios?
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Growth ETFs were clear winners earlier this year but value outperformed growth during the recent sell-off. We discussed some of the recent trends and strategies like value, quality and low volatility that may work going forward.
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