SPGP - SPGP: A Rare Market-Beating Fund That Focuses On Growth At Reasonable Prices

2023-11-22 10:51:11 ET

Summary

• Invesco S&P 500 GARP ETF aims to beat total market returns by investing in reasonably priced growth stocks within the S&P 500 index.
• The fund has outperformed the S&P 500 index significantly over the past 10 years and since its inception.
• The fund's top holdings have shown impressive growth in earnings, with reasonable price-to-earnings ratios.
• Still, there are concerns that the fund might be relying too much on certain sectors such as energy and commodities.

Invesco S&P 500 GARP ETF (SPGP) is an interesting fund that aims to beat total market returns by investing in growth stocks at a reasonable price. In fact, GARP is an acronym for "Growth At Reasonable Price". The fund's management argues that growth stocks don't have to be expensive and there are still plenty of growth names within the S&P 500 index (SPY) that are reasonably priced. By investing in these specific stocks, it should be possible to achieve market-beating returns, at least in theory.

SPGP has been around for a little over 10 years and its performance so far is impressive. The fund is up 445% while S&P 500 index has been up 352% during the same period so the fund has been outperforming the overall index by a margin of 26%. Since we know that it is extremely rare for actively managed funds to beat the S&P 500 in the long run, this is quite impressive.

The fund exclusively invests in stocks that are part of the S&P 500 index so you know that it won't bet into highly volatile small caps, penny stocks, or speculative plays. The fund typically excludes companies that haven't been growing at a decent level or those that lack profits. So, what is the fund invested in right now? It currently seems to hold a basket of 78 stocks with no stock having a larger weight than 2.3% and the 10 stocks only account for 20% of its total weight. It appears that the fund holds a lot of stocks in the energy, materials, and resources industries.

When we look at the fund's top 10 holdings, they've grown their earnings anywhere from 111% to 627% in the last 5 years so they all posted impressive growth during this period. This doesn't surprise me much considering that we've had a period of elevated inflation where energy and commodity prices rose so much which helped this company post oversized growth.

You might be wondering how these companies are priced after posting such impressive growth rates in the last 5 years. It turns out that their P/Es now range from 5 to 24. Out of the top 10 holdings of the fund, 9 of them have a P/E below 12 and 8 of them have a single-digit P/E. They do seem to be priced reasonably. Also, keep in mind that every single one of these companies is highly profitable and some are even paying dividends.

The fund seems to be functioning as it is advertised. It is invested in companies that are growing their net income in double digits while enjoying low P/E multiples. Then again one could also make the counter-argument saying that many of those companies didn't really post organic growth where they sold more products in more markets. Many of these companies simply benefited from a sharp rise in energy & commodity prices so their growth story might not be repeated. As a matter of fact, we are already seeing their profits start dropping from 2022 highs as commodity prices are correcting back to historical norms, driven by monetary actions of the Fed and other central banks around the world.

If this continues, the fund will have to change its holdings and switch to other stocks. The fund assigns a "growth score" as well as a "quality and value composite" score to each one of its holdings when determining whether to hold a particular security or not. If a company's growth comes to a halt, it's removed from the index. If a company's quality suffers or its valuation reaches higher than reasonable levels, it is replaced by another company that fits the fund's criteria better.

The fund's current characteristics (as of 9/30) show that its holdings have an average trailing P/E of 11.82 and an average forward P/E of 12.81. The fact that its forward P/E is higher than its trailing P/E indicates that there is already an expectation that earnings will drop a bit in the next year. Still, the fund's P/E ratio is significantly below, in fact, half of the P/E ratio of the S&P 500 index which is 22.

Looking at the fund's top 10 holdings alone might be a bit misleading though. When we look at the fund's total sector allocation we see that the second biggest sector is technology with a total weight of 19.09%. We also see healthcare stocks with a weight of 11.32% even though we didn't see many technology or healthcare stocks in the fund's top 10 holdings. While the fund is overweight in the energy sector by a weight of 27%, it's not all in energy either. Between energy and materials, the fund has a commodity exposure of 41% which might be concerning to investors who believe that commodity prices aren't likely to keep increasing in this environment.

We would like our growth companies to achieve organic growth through increasing their volume, entering new markets, launching new products and services, finding new ways to generate revenues, and reach growth through innovation. If a company relies on commodity prices and inflation for its growth, it may not be a true growth company. This is something to watch for if investors are looking for organic growth in their growth funds.

The fund has a dividend yield of 1.15% which isn't much but its dividend growth has been impressive in recent years. In the last 5 years, the fund's annual average compounded dividend growth rate has been 24% even though its longer-term dividend growth rate (10 years) is much smaller at 6.7% so maybe its recent dividend growth is an outlier rather than the norm. Investors probably shouldn't consider this mainly as a dividend or income play. Then again, if you bought this fund a decade ago and held it until now, your yield on cost would be closer to 4% which isn't too bad.

This is a good fund with a track record of beating the S&P 500 by a large margin which is very rare. Whether this track record continues in the future will depend on the fund's selection of stocks and how many reasonably valued organic growth stocks it can find. There is always the danger that the fund could buy stocks whose recent growth has been fueled by external factors such as commodity prices or inflation which could increase this fund's reliance on those external factors (such as commoditities) which could hurt its long-term performance. If the fund doesn't fall into that trap, it could continue to deliver outsized returns.

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