A Growth ETF for 2013
With just a few trading days left in 2012, it is fair to say, broadly speaking, that the soon-to-be completed year was kind to growth stocks. Even with a recent downturn, Apple (NASDAQ: AAPL) is up 28.4 percent for the year. Amazon (NASDAQ: AMZN) is sitting on a gain of 49.4 percent and the list goes on from there.
However, as S&P Capital IQ notes, value stocks in the S&P 500 have outperformed the index's growth constituents this year. The good news is that improvements in the U.S. and global economies, a recovery in S&P 500 earnings along with modest valuations mean 2013 could work out to be a good year for growth stocks.
One ETF with which to play a resurgence in large-cap growth names is the iShares S&P 500 Growth Index Fund (NYSE: IVW), which has over $6.6 billion in assets under management. The fund received an Overweight rating from S&P Capital IQ in a recent research note by the firm.
"Generally, growth stocks trade at a higher price to earnings (P/E) multiple to the broader market, but have appeal for their stronger earnings prospects," said S&P Capital IQ in the note. "This is currently the case as, according to S&P/Dow Jones Indices data as of December 14, the S&P 500 Growth Index trades at a premium 2013 P/E multiple of 13.6X Capital IQ consensus estimated EPS for 2013, vs. the 12.5X of the broader S&P 500 Index, but had a P/E-to-growth ratio of 1.1X, vs. 1.2X."
IVW, which charges annual fees of 0.18 percent, is similar to many large-cap growth ETFs in that it is debatable as to how many of the fund's holdings can legitimately wear the growth label. Apple and Google combine for about 10 percent of the ETF's weight, but other top-10 holdings includes stocks that can be accurately described as value names including Exxon Mobil (NYSE: XOM), Johnson & Johnson (NYSE: JNJ) and Procter & Gamble (NYSE: PG). S&P Capital IQ notes that it has Strong Buy or Buy ratings on eight of the ETF's top-10 holdings.
Overall, IVW is home to 285 stocks and the value tilt is heavy as health care and consumer staples names account for nearly 30 percent of the fund's weight.
"Despite its growth bias, IVW has exposure to all 10 GICS sectors, with the largest representation in information technology (27% of assets as of October 2012, vs. 19% in the S&P 500 Index), health care (16%, vs. 12%) and consumer staples (14%, vs. 11%). In contrast, financials, telecom services and utilities sectors are underrepresented in this ETF compared to the parent benchmark," said S&P Capital IQ.
In addition to its significant exposure to the technology sector, IVW does sport valuations that underscore the ETF's growth bias. The ETF has a price-to-earnings ratio of 20.31 and a price-to-book ratio of 5.11, according to iShares data. Conversely, the iShares Core S&P 500 ETF (NYSE: IVV) has a P/E ratio of 19.16 and price-to-book ratio of 3.8. In IVW's favor is a beta of 0.95 against the S&P 500, a statistic that implies the ETF can help investors temper some of the volatility that often accompanies growth stocks.
Investors looking for an alternative to IVW should evaluate the Vanguard Growth ETF (NYSE: VUG), which is home to 457 stocks and expense ratio of 0.1 percent. VUG and IVW share many of the same holdings, though VUG's top-10 constituents represent 28.2 percent of that ETF's weight compared to IVW's top-10 lineup accounting for 29.15 percent of that ETF's weight.
VUG's beta is slightly higher than IVW's and that may be one reason why the ETF has gained 17.2 percent this year compared to nearly 14.6 percent for IVW.
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