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No Surprise: FAANG's A Big Deal For Growth Indexes, ETFs

August 13, 2018 1:14 pm
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July was the first month in some time that large-cap value stocks outperformed their growth rivals. Growth fans may be apt to say some company-specific issues plagued growth stocks last month.

But with a small number of stocks accounting for significant portions of widely followed growth indexes, such as the Russell 1000 Growth Index, there's some credibility to the aforementioned argument.

What To Know

When it comes stocks dominating growth benchmarks, that often means Facebook Inc. (NASDAQ:FB), Amazon.com Inc. (NASDAQ:AMZN), Apple Inc. (NASDAQ:AAPL), Netflix, Inc. (NASDAQ:NFLX) and Google parent Alphabet Inc. (NASDAQ:GOOGL), also known as the FAANG quintet.

The iShares Russell 1000 Growth ETF (NYSE:IWF) is one of the exchange traded funds that tracks the Russell 1000 Growth Index. As of Aug. 9, four of the five FAANG stocks were among IWF's top 10 holdings with Netflix being the exception, but that stock is part of IWF's roster.

Combined, IWF's FAANG exposure as of Aug. 9 was 22.1 percent.

Why It's Important

“US large cap growth stocks have outperformed their value counterparts in the last year, with a slight pullback in July,” said FTSE Russell. “This parallels how FAANG stocks have performed relative to the broad Russell 1000 large cap equity index for the same time period.”

The iShares Russell 1000 Value ETF (NYSE:IWD), which tracks the Russell 1000 Index, has no FAANG exposure. IWD allocates 18 percent of its combined weight to the technology and consumer discretionary sectors, groups that are usually cornerstones of growth funds. IWF, the growth ETF, devotes about 59.4 percent of its roster to those sectors.

What's Next

For traditional growth ETFs, like IWF, what comes next largely revolves around price action in the FAANGs.

“While the Russell 1000 Growth Index’s 12.8% YTD total return still soundly leads the Russell 1000 Value’s 2.7% gain[1], growth’s leadership stalled recently as FAANG stocks leadership eased,” said FTSE Russell Managing Director Alect Young.

Young highlighted the aforementioned sector differences as integral to explaining the diverging performances between the growth and value indexes. Barring a significant turn in value stocks, IWD is poised to trail IWF yet again this year.

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