IMCG - GRPM Shows Value And Quality But No Excess Return

2024-01-10 11:04:28 ET

Summary

• Invesco S&P MidCap 400® GARP ETF follows a "Growth At a Reasonable Price" strategy in the S&P MidCap 400 Index.
• GRPM fund is well-diversified across sectors and holdings, with a focus on consumer discretionary and energy.
• While GRPM has superior valuation and quality metrics compared to the parent index, it has not provided significant excess return over the benchmark or competitors.

GRPM strategy

Invesco S&P MidCap 400® GARP ETF ( GRPM ) started investing operations on 12/03/2010 and tracks the S&P MidCap 400 GARP Index. It has 60 holdings, a 12-month dividend yield of 0.97% and an expense ratio of 0.35%. Distributions are paid quarterly.

“GARP” stands for Growth At a Reasonable Price. The starting universe is the S&P MidCap 400 Index. As described by S&P Dow Jones Indices, a Growth score and a Quality & Value score are calculated based on Z-scores of fundamental ratios:

• 3-year Earnings-per-Share Growth and 3-year Sales-per-Share Growth for the Growth score.
• Return on Equity, Financial Leverage Ratio (total debt divided by book value) and Earnings Yield for the Quality & Value score.

Outliers are winsorized to avoid distortion by extreme values. The 120 best-ranked companies regarding the Growth Score are ranked using the Quality & Value score, then the 60 best-ranked companies are included in the index.

They are weighted by Growth score, with a maximum of 5% by constituent and 40% by sector. The index is rebalanced semi-annually with a 20% buffer rule to reduce portfolio turnover. In the most recent fiscal year, the turnover rate was 33%.

GRPM portfolio

The fund invests exclusively in U.S. companies, about 30% mid-caps and 70% small-caps according to Fidelity classification. The portfolio is quite heavy in consumer discretionary (25.1%) and energy (21.1%). Compared to the parent index, represented in the next chart by SPDR S&P MidCap 400 ETF ( MDY ), GRPM overweights these two sectors, and to a lesser extent materials. It underweights financials, industrials, almost ignores utilities, and passes over communication and real estate.

The portfolio is well-diversified. The top 10 holdings represent 25% of assets, and all constituent weights are under 3.2%, so risks related to individual companies are moderate.

Ratios from Portfolio123.

Fundamentals

Valuation looks attractive relative to the mid-cap universe. GRPM is much cheaper than MDY regarding the price/earnings, price/sales and price/cash flow ratios, as reported in the next table.

In previous articles, I have shown how three quality factors may help cut the risk: Return on Assets , Piotroski F-score , and Altman Z-score . In my ETF reviews, I consider that risky stocks are companies with at least 2 red flags among: bad Piotroski score, negative ROA, unsustainable payout ratio, bad or dubious Altman Z-score, excluding financials and real estate where these metrics are less relevant. With these assumptions, 6 stocks out of 60 are risky and they weigh 12% of asset value. This is not a good ratio, but still acceptable.

Based on my calculation of aggregate metrics reported in the next table, the return on assets is excellent, pointing to a portfolio quality superior to the benchmark.

Performance

As reported in the next table, return and risk metrics since inception are not much different from the parent index. GRPM beats MDY by 28 bps in annualized return, but it shows a slightly higher volatility and a marginally lower risk-adjusted performance (Sharpe ratio).

The difference between the two funds has also been minimal in the last 12 months:

Competitors

The “GARP” concept is a combination of growth and value styles. The next table compares characteristics of GRPM, three growth ETFs and a value ETF in the mid-cap universe:

• Vanguard Mid-Cap Growth ETF ( VOT )
• iShares S&P Mid-Cap 400 Growth ETF ( IJK )
• iShares Morningstar Mid-Cap Growth ETF ( IMCG )
• iShares S&P Mid-Cap 400 Value ETF ( IJJ )

GRPM has the highest fee and the lowest liquidity in dollar volume. Regarding total return since its inception and in the last 12 months, GRPM is in the middle of the pack.

Takeaway

Invesco S&P MidCap 400 GARP ETF implements a “Growth At a Reasonable Price” strategy in the S&P MidCap 400 Index. It is well-diversified across sectors and holdings. Valuation and quality metrics are superior to the parent index.

However, GRPM has not provided significant excess return over the mid-cap benchmark and competitors since its inception. It doesn’t look riskier than other mid-cap funds, but past performance doesn’t justify the higher expense ratio.

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