How To Properly Utilize Growth and Value ETFs

IVE holds 360 stocks from the S&P 500 with a focus on value characteristics.  The top sectors in this ETF include: financials (22%), energy (13%), and health care (12%).  By contrast, IVW focuses on growth companies with 318 holdings that overweight technology (34%), consumer discretionary (18%), and health care (17%).

A look at a 3-year chart shows that IVW (growth) has added meaningful alpha above the traditional benchmark and IVE (value) has lagged.

The results may speak for themselves in terms of the dominant sector positioning.  Technology and consumer discretionary has been near the top of the pack, while financial and energy stocks have lagged during this time span.

There are many ways that investors can interpret this data.  Some may feel inclined to capitalize on the relative strength in growth, while others may feel that value indexes are due to play catch up.  There are also other considerations such as dividend yield, valuation ratios, and index construction criteria that may play a role in this decision as well.

In a real world example, we implemented a change to our client portfolios this year to move away from a smart beta low-volatility index to IVE.  This allowed us to shift our exposure away from stocks that we believed to be fundamentally overvalued to areas with greater potential for sustainable returns. This also coincided with our firm views on the top sector positions within this ETF and our market outlook moving forward.  When paired with other diversified equity positions, it creates a reasonable tilt towards the value side of the ledger.

One important thing to note when selecting growth our value ETFs is how they complement existing holdings.  It doesn’t make sense to own the exact same share amounts of each because you are essentially reverting back to the original index and over-complicating your portfolio.  This is a common misuse of the growth or value theme rather than to give the portfolio a meaningful bias.

It’s also worth noting that there is a large menu of available options in both passive and actively managed ETFs.  Investors can choose between varying index providers or portfolio construction techniques that make the most sense for their risk tolerance and long-term goals.  The ability to fine-tune your asset allocation and exposure with complete transparency is just one more reason why I love these tools.

Note: This article is written by David Fabian and was originally published on the FMD Capital Management blog. FMD Capital Management is a fee-only investment advisor which provides daily updates on ETFs, portfolio strategies, and market insights. Contact them for a free portfolio review.