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This is one of a series of articles discussing smart beta ETFs. Other smart beta articles you can read:
A growth ETF follows an index that selects stocks based on the growth rate of each stock. Some growth ETFs will also weight their holdings based on each stock's growth rate, rather than weighting their holdings using market capitalization.
The concept of a "growth ETF" is a little confusing because during the 1990s and early 2000s, when ETFs were first taking off, the investment community tried to classify all stocks into "value" stocks and "growth" stocks. So during the early days of the ETF industry, if you wanted to outperform the market, you had to buy an ETF that was labeled as either a "value ETF" or a "growth ETF". Each of the major index providers (MSCI, Russell, FTSE, and S&P) had their own way of classifying every stock as either a "growth" or a "value" stock.
Fast forward to today. Today, with the new terminology of "smart beta" and "factor investing", the concept of every stock being a "value" stock or a "growth" stock is somewhat outdated. Many of the old "growth" ETFs would actually be labeled today as a "multi-factor" ETF, because if you read the fine print about what the old "growth indexes" were doing, they were looking at numerous factors like quality, momentum, and volatility.
Because the tricky part about understanding growth ETFs is understanding what they define as "growth", let's run through some examples.
IVW, the iShares S&P 500 Growth ETF, one of the oldest growth ETFs, tracks the S&P 500 Growth Index, which measures growth using three factors: sales growth, the ratio of earnings change to price, and momentum. The selected stocks (around 300) are weighted using market capitalization.
VUG, the Vanguard Growth ETF, another one of the oldest growth ETFs, tracks the performance of the CRSP U.S. Large Cap Growth Index. CRSP classifies growth securities using the following factors: future long-term growth in earnings per share (EPS), future short-term growth in EPS, 3-year historical growth in EPS, 3-year historical growth in sales per share, current investment-to-assets ratio, and return on assets.
RPG, the S&P 500 Pure Growth ETF, tracks the S&P 500 Pure Growth Index. Similar to the S&P 500 Growth Index, the S&P 500 Pure Growth Index selects growth stocks using three factors: sales growth, the ratio of earnings change to price, and momentum. But only stocks with the highest growth characteristics are included in the index (about 115 stocks), and the stocks are weighted in the index based on their style score.
Growth ETFs are tricky to analyze and categorize in the context of factor investing because many growth ETFs are actually multi-factor ETFs, but they aren't labeled as "multi-factor" ETFs.
VUG, for example, uses several earnings related criteria, including return on assets, that factor research has labeled as the "quality" factor. VUG also screens for "current investment-to-assets ratio", which factor research has labeled as the "investment factor". So VUG is a multi-factor ETF using the quality, growth and investment factors, but it was launched before "smart beta" was invented as a marketing idea.
IVW and RPG are similarly tricky to analyze in terms of factor investing. They both screen on "price momentum", which is a well known factor. They also screen using the "ratio of earnings change to price", which presumably is a way to screen for profitable companies, which would be the "quality" factor, and also maybe a way to screen on value.
Of these older growth ETFs, RPG seems like a winner, with a steady track record of outpacing SPY, as shown by this ratio chart:
There are a large number of growth ETPs, as shown in this table:
|Year of Inception||Count|
Note that there were actually even more ETFs launched then this table shows, as we are only displaying the launch dates of ETFs still active in our database. There were more ETFs that were launched during these years that have since been closed down by their sponsor.
More and more ETFs are being launched that combine growth investing with other investment factors:
|Number of Factors Used||Count|
Since growth ETFs are using so many different ways to select stocks, it is difficult to analyze growth ETFs.
One thing we do at ETFAnalyst.com is give each ETF a rating for long term investors. Here are the growth ETFs that we have given a long-term investor rating of "editor's choice", our highest rating:
|RPG||Invesco S&P 500 Pure Growth ETF||03/01/2006||US Equity|
|FDT||First Trust Developed Markets Ex-US AlphaDEX ETF||04/18/2011||Global Equity|
All data is a live query from our database. The wording was last updated: 11/20/2017.
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