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ETFs For ‘Growth’ And ‘Value’ Stocks Can Trip Up Investors
If one is interested in one style (growth) or another (value), then perhaps one of these makes sense. But in combination, the argument is much less compelling.
That's because, as S&P notes in its methodology document, its growth and value indexes (as opposed to its pure growth and pure value indexes) are designed to minimize churn:
It is also worth noting that the assignment of the market capitalization of stocks not in Style baskets to growth and value indices allows graduated moves, and avoids churning of stocks between indices at each reconstitution.
Roughly speaking, you're getting half the S&P 500, because each of the style indexes includes 1/3 of the parent index (by market cap), and the pure style indexes chop off approximately 1/4 that (by style). 3/4 x 1/3 = 1/4 for each of the two pure style indexes.
But you get distortions by overlaying equal weighting on top of style weighting of market weighting. You can read the methodology yourself; my take is that one can wind up with more (or fewer) stocks in the pure value index than in the pure growth index. That's born out by the figures - according to the Guggenheim ETF prospectus, there are 123 stocks in the pure value index and 106 stocks in the pure growth index.
So growth stocks in the proposed 50/50 mix of ETFs are more heavily weighted than value stocks. The former are weighted 1/2 x 1/106, while the latter are weighted 1/2 x 1/123. That may be fine, but it calls into question why one is weighting the two ETFs equally, given the premise of the ETFs themselves is to give all stocks equal weight.
Also, if one's objective is an equal weighting of growth and value (however one defines equal weighting), then it seems one will have to rebalance periodically, as that 50/50 mix (or however one is weighting the multiple funds) will drift over time.
Put all of this together, and one comes up with what seems like an obvious question: if the objective is equal weighting and a combination of value and blend, why not use an equal weighted S&P 500 index fund?
Addendum - you're getting more heavily weighted mid cap stocks because of equal weighting, but you're not (in theory) getting inclusion of any more midcap stocks than are already in the S&P 500. Same for small caps, with the observation that M* reports zero small caps in RPG, and 0.51% in RPV.
Ironically enough, all those small cap stocks are classified by M* as small cap blend. So much for style purity, which gets one back to the original article.
Comments
http://etfdb.com/news/2015/02/24/why-pure-style-etfs-matter-examining-growth-rpg-and-value-rpv/
That's because, as S&P notes in its methodology document, its growth and value indexes (as opposed to its pure growth and pure value indexes) are designed to minimize churn: Roughly speaking, you're getting half the S&P 500, because each of the style indexes includes 1/3 of the parent index (by market cap), and the pure style indexes chop off approximately 1/4 that (by style).
3/4 x 1/3 = 1/4 for each of the two pure style indexes.
But you get distortions by overlaying equal weighting on top of style weighting of market weighting. You can read the methodology yourself; my take is that one can wind up with more (or fewer) stocks in the pure value index than in the pure growth index. That's born out by the figures - according to the Guggenheim ETF prospectus, there are 123 stocks in the pure value index and 106 stocks in the pure growth index.
So growth stocks in the proposed 50/50 mix of ETFs are more heavily weighted than value stocks. The former are weighted 1/2 x 1/106, while the latter are weighted 1/2 x 1/123. That may be fine, but it calls into question why one is weighting the two ETFs equally, given the premise of the ETFs themselves is to give all stocks equal weight.
Also, if one's objective is an equal weighting of growth and value (however one defines equal weighting), then it seems one will have to rebalance periodically, as that 50/50 mix (or however one is weighting the multiple funds) will drift over time.
Put all of this together, and one comes up with what seems like an obvious question: if the objective is equal weighting and a combination of value and blend, why not use an equal weighted S&P 500 index fund?
Ironically enough, all those small cap stocks are classified by M* as small cap blend. So much for style purity, which gets one back to the original article.
Yeah, I was wondering about that and how it works, in terms of what accounts for the outperformance.
Should not have used the term 'small', my bad; meant smaller.