SPY - SPGP ETF: Will It Continue To Outperform The Market?

2023-03-13 15:55:24 ET

Summary

• Invesco S&P 500 GARP ETF has significantly outperformed the market over the past decade by combining value and growth-factor loading.
• Its current valuation metrics indicate an attractive value proposition.
• On the flip side, SPGP charges a high 0.33% expense ratio and pays a lower dividend compared to the market.

Thesis

In the current, turbulent market environment, many investors seek to spot alternatives to broader market exchange-traded funds ("ETFs") in order to either diversify their portfolio or seek improved returns. Invesco's S&P 500 GARP ETF ( SPGP ) is a factor-loaded ETF that seeks to outperform the market by ranking securities in terms of both their growth and value attributes. In this analysis, I explore the fund's attributes, allocation, valuation and risk/return performance.

Over the TTM, SPG has recorded a -4.28% loss compared to the S&P 500's (SP500) -8.13% for the same period, as the market struggles to regain its footing. SPGP currently maintains $2.7B of Assets Under Management and pays a 1.22% dividend yield.

Brief Overview

The Invesco S&P 500 GARP ETF aims to track the S&P 500 Growth at a Reasonable Price Index. For that reason, it invests at least 90% of its total assets in the component securities that comprise the index. The main idea behind the index and SPGP is to identify companies that score high both in growth and value composites scores. The index currently consists of around 75 securities. It is rebalanced and reconstituted semi-annually. SPGP is solely invested in U.S. equities.

Smart Allocation for Superior Gains

When comparing sector allocation for the fund with an S&P 500 ETF such as SPDR S&P 500 Trust ETF ( SPY ), it is immediately clear that SPGP employs a more conservative allocation. To be more specific, the technology sector is weighted at 28% in SPY and 19% in SPGP. On the other hand, more defensive sectors like Healthcare are more heavily weighted in SPGP (27% VS 11% FOR SPY). SPGP, however, is less weighted towards Consumer Staples and Communications sectors that are both more defensive in nature.

Overall, limited exposure in technology has led the SPGP to outperform the market over the past few years while a more targeted allocation, looking to maximize the growth/value trade-off. The ETF is, therefore, well set for strong returns in the future.

A Strong Alternative to the S&P 500

The SPGP ETF has been in the market for over a decade now (incepted in 2011), so a performance comparison with the S&P 500 is in order. To that end, and for the segment that will follow as well, I have employed the tools offered by Portfolio Visualizer. Going back to 2011, an SPGP vs SPY was back tested, as seen in the graph below. Annual rebalancing and dividend reinvestment are assumed in the simulation.

Evidently, SPGP has significantly overperformed over the 10+ year period available, with most of the gains relative to the S&P 500 materialized after 2018 and were accelerated after the Covid-19 pandemic in 2020. Even during the ongoing market downturn since 2022, the fund continues to significantly outperform the broader market.

On more technical terms, a $10,000 initial investing balance in 2011 would have yielded $37,409 with SPY and $49,261 with SPGP. The 14.65% CAGR SPGP records over the last 12 years is more than impressive, especially when compared to the S&P 500's 11.07% CAGR. The fund however exhibits slightly higher standard deviation (16.92% vs 14.74% for SPY). On the contrary, SPGP has recorded smaller losses during its worst year (-13.83% vs -18.17% for SPY) and bigger gains over its best year (38.98% vs 32.31% for SPY). SPGP's strong performance has led to superior Sharpe and Sortino ratios compared to the S&P 500 and also lower correlation (0.94). Risk/return metrics described in this segment are available in the table presented below.

Valuation

Based on the data provided by Invesco and ETF.com , Invesco S&P 500 GARP ETF maintains attractive valuation attributes. The fund has a weighted average of $133B compared to the S&P 500's $466B which indicates stronger growth opportunity (and possibly more risk). SPGP trades at a 11.3x P/E and 3.0x P/B when the S&P 500 trades at 19.9x P/E and 4.0x P/B. Both metrics indicate that SPGP is significantly undervalued and poised for strong performance over the mid-term.

A Couple of Counterarguments to Consider

Invesco's S&P 500 GARP ETF has a relatively short record of just over 11 years. As such, its allocation strategy hasn't been tested in terms of performance and risk over a more extensive time period. What appears to be currently working is not necessarily going to continue to do so in the future. After all, superior returns to the market are indeed very rare for prolonged periods of time. A mean reversion for the fund would result in poor performance and reinforced selling pressures, given its small assets under management ("AUM") and trading volume.

A couple more things to consider have to do with SPGP's expense ratio and dividend pay-outs. The fund charges a very pricey 0.33% expense ratio when all major S&P 500 ETFs available charge less than 0.10%. In the case that the fund's return revert closer to market averages the spread in expense ratios can significantly hurt compounding returns over longer time periods. SPGP also has a lower dividend yield compared to S&P 500 ETFs (1.22% vs 1.65%).

Final Thoughts

After all things are considered, Invesco S&P 500 GARP ETF represents a solid alternative to traditional funds given its record and valuation metrics. However, it would be advisable, in my view, to employ the SPGP fund as an addition to a broader portfolio given its shorter-lived record compared to most major ETFs in the market. I would currently rate the Invesco S&P 500 GARP ETF as a buy.

For further details see: