VUG - SPYG: Positioning For Growth In The Current Market

2023-05-08 12:55:44 ET

Summary

• The growth factor has underperformed through 2022 and is still more expensively valued, compared to value stocks.
• SPYG offers an inexpensive, proven option for investors looking to gain growth exposure.
• The fund performs well compared to most of its peers (VUG, IWF and SCHG), while also paying a higher dividend yield.

Thesis

Growth investing has somewhat decreased in popularity since the stock market drop of 2022, leading many growth, high-multiple names to consecutive lows and significant losses. For investors not interested in stock picking, growth ETFs have been a staple and well-performing choice for years. In this analysis, I explore whether the SPDR Portfolio S&P 500 Growth ETF ( SPYG ) represents a sound option for gaining exposure towards the growth factor, especially compared to a group of its peers.

Over the past year, SPYG has recorded a -3.11% loss compared to a broader market (S&P 500) loss of -0.29%. The outlook for growth stocks also remains precarious as macroeconomic conditions indicate that stock market volatility is likely to persist.

A Popular Growth ETF

SPYG offers investors exposure to a diversified range of large-cap U.S. stocks, geared towards the growth factor. The SPDR Portfolio S&P 500 Growth ETF aims to track the S&P 500 Growth Index that measures the performance of the large-capitalization growth segment of the U.S. equity market. The fund offers investors a low-cost option to gain exposure to large-cap U.S. stocks that exhibits growth attributes. SPYG charges a 0.04% expense ratio and pays a 1.05% dividend yield. SPYG holds around 230 securities with a weighted average market cap of $788B. The fund was incepted in September, 2000 and currently maintains over $16B of assets under management, being one of the more popular choices in the growth ETF space for investors.

Fund Composition

Like most large-cap funds, SPYG is heavily weighted towards the technology sector. Apple ( AAPL ), Microsoft ( MSFT ) and Alphabet ( GOOG ) (GOOGL) constitute the fund's largest holdings. While the technology sector faced mounting selling pressures in 2022, with many up-and-coming names having lost a big share of their capitalization, technology mega-caps have recovered substantially as they continue to deliver strong financial results.

Growth Factor Attractiveness

While growth stocks were hurt badly during the 2022 stock market contraction, value stocks outperformed recording small or no losses at all. Growth was valued at extraordinary multiples at the beginning of 2022, when the forward P/E of Value vs Growth ratio stood at around 0.50 (20-year lows). Naturally, the value factor has outperformed since. Currently, even though the forward P/E of Value vs Growth ratio has recovered, it still signals that growth stocks are, in general, overvalued.

Growth stocks are naturally more cyclical and therefore sensitive to market cycles. Both technology services and durable consumer goods (usually having growth attributes) are to some extent discretionary and are expected to underperform during times of economic hardship. As many macroeconomic indicators signal that a recession might lie ahead, the growth factor is expected to raise uncertainty and volatility levels.

Growth ETF Comparison

The large-cap growth space in U.S. equities offers many alternative choices for investors. Among them, I compiled a list of the most popular ones, including Vanguard's Growth Index Fund ( VUG ), iShares Russell 1000 Growth ETF ( IWF ), Schwab's US Large-Cap Growth ETF ( SCHG ). SPDR's S&P 500 ETF ( SPY ) was also considered for comparison purposes. For the purpose of the comparison analysis, I employed the tools offered by Portfolio Visualizer. Annual dividend reinvesting is assumed for the backtest.

Over the past 12+ years, all ETFs and especially the growth-oriented ones have recorded solid growth performance, offering investors substantial gains. Overall, IWF has recorded the best performance returning $58,154 on a $10,000 initial investment (14.12% CAGR), compared to SPYG's $54,594 (13.58% CAGR).

Despite lacking a bit in return performance compared to its peers, SPYG has the lowest volatility in the group (15.77% standard deviation), only behind SPY. The fund also has the second highest Sharpe ratio, indicating attractive risk-adjusted return performance. In detail, the backtest results are presented in the table and graph below.

The Valuation Perspective

While past performance metrics are useful to gauge the relative potential of different growth ETFs, their current valuation outlook is also critical in determining their attractiveness. According to ETF.com, SPYG is inexpensively valued in terms of P/E (20.7x), compared to all its growth ETF peers, only slightly more expensive than the S&P 500. The same is indicated by its 6.92x P/B ratio and the fact that it pays the larger dividend yield (1.05%), behind SPY. While the fund's current multiples are still higher than market averages in historical terms, they are comparatively attractive. With 232 total holdings, SPYG is slightly less diversified than its counterparts.

Final Thoughts

After all things are considered, the growth factor seems likely to provide underwhelming performance over the mid-term, due to both macroeconomic and valuation concerns. However, SPYG seems to offer attractive performance and valuation characteristics compared both to the S&P 500 and its peers. For these reasons, I would rate the ETF as a hold.

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