In 2023, investing in growth was highly rewarding. We all heard about the Magnificent Seven 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 Chevron (CVX), Exxon Mobil (XOM), and UnitedHealth Group (UNH). Meanwhile, IVW removed some previously prominent growth companies like Meta Platforms (META).
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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