RPG - RPG: Growth ETF But Not What You Think

2023-07-18 22:55:35 ET

Summary

• The Invesco S&P 500® Pure Growth ETF mirrors a proprietary index and focuses on securities that exhibit strong improving characteristics in the S&P 500® Index, rather than traditional 'growth' stocks.
• The fund's top sectors are currently energy and health care, and it rebalances annually based on its index's scores, capturing names with improving fundamentals and momentum.
• Despite its name, the ETF is more of a momentum ETF and does not represent an alternative to the Nasdaq or a fund that will necessarily contain disruptors and innovators.

Thesis

The Invesco S&P 500 ^® Pure Growth ETF ( RPG ) is an exchange traded fund. Despite its name, the vehicle does not focus on "classic" growth names in the technology or artificial intelligence sectors, but mirrors a proprietary index, namely the S&P 500 Pure Growth Index :

The Fund will invest at least 90% of its total assets in securities that comprise the Index. The Index measures the performance of securities that exhibit strong growth characteristics in the S&P 500 ^® Index. First, each security in the S&P 500 is assigned two “style scores” – one for value and one for growth – based on the characteristics of the issuer. The “value score” is measured using three factors: book-value-to-price ratio, earnings-to-price ratio, and sales-to-price ratio. The “growth score” is measured using three other factors: three-year sales per share growth, the three-year ratio of earnings per share change to price per share, and momentum (the 12-month percentage change in price). The ratio between the growth score and the value score is used to rank each stock as either deep value, blend or deep growth. Only the deep growth stocks are selected and are factor weighted such that securities demonstrating the strongest growth characteristics receive proportionally greater weights. The Fund and the Index are rebalanced annually.

This construction methodology ends up capturing names which might be from any industry sector, but have improving fundamental metrics. To that end the fund is currently overweight the Energy sector:

The second largest sector in the portfolio is Health Care, followed by Technology. In fact technology has a much lower weighting here than in the S&P 500 index.

When looking at the building blocks here, this fund is more apt to capture momentum names rather than traditional 'growth' stocks. By traditional 'growth' names we are referencing here the components of the Nasdaq, which generally have innovative business models that are set to disrupt entire sectors. Artificial intelligence names are a prime example of that feature. Not here.

Current Holdings

The Index rebalances annually based on its scores, so the collateral will constantly change. Presently, the top components of the fund are from the Materials and Energy sectors:

At the end of the day here an investor is relying on the Index's calculation methodology to identify momentum names that are exposing 'growth' features, either due to prior business model crashes or other developments in their respective industries.

Analytics

• AUM: $1.9 bil.
• Sharpe Ratio: 0.31 (3Y).
• Std. Deviation: 22.6 (3Y).
• Yield: 1.4%
• Premium/Discount to NAV: n/a
• Z-Stat: n/a
• Leverage Ratio: 0%
• Composition: Momentum Equities
• Expense Ratio: 0.35%

Historic Performance

The fund is better aligned from a historic perspective with the iShares MSCI USA Momentum Factor ETF ( MTUM ) rather than the SPY:

We can see both RPG and MTUM underperforming the SPY on the 3 year look-back. The dynamic is similar on a 5-year look-back:

Momentum versus Growth

Momentum is different from the classic 'growth' model because momentum shows the rate of change in price movement over a period of time to help investors determine the strength of a trend, whereas classic growth addresses businesses which are disruptors and innovators. Investors assign growth stocks very high P/E ratios because they expect the respective companies to change the way things are done. And we have seen this time and time again, from the advent of Tesla ( TSLA ) in the auto business to the disruption brought about by Amazon ( AMZN ) in the retail business. You are not going to get that with RPG. This fund will purely identify momentum names that are improving their fundamental ratios. Do expect many of the names in the fund to be dropped once the yearly rebalancing occurs.

Conclusion

RPG is an equities exchange traded fund. The fund is built to follow the S&P 500 Pure Growth Index . The index has a proprietary methodology aimed to capture names with improving fundamentals and momentum. To that end, the names present in RPG are not traditional 'growth' names, but represent companies from all sectors of the S&P 500. Currently Energy and Health Care are the top sectors in RPG. The fund rebalances once a year, following the index methodology. This ETF is more of a momentum ETF rather than a traditional 'growth' one as the name might suggest. The fund's performance is historically well aligned with another momentum ETF, namely the iShares MSCI USA Momentum Factor ETF. RPG has robust historic returns, and will continue to exhibit them since the factor methodology is sound. However do not expect RPG to represent an alternative to the Nasdaq or a fund that will contain disruptors and innovators. The ETF is up only 5% this year due to its Energy sleeve, but we are not a buyer here. We would like to see the name rebalance before allocating capital here. We are on Hold with respect to this name.

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