2023-12-08 08:39:55 ET
Summary
- SPDR Portfolio S&P 500 Growth ETF is a buy due to its strong performance, low expense ratio, and comparatively high dividend yield among growth ETFs.
- SPYG has enjoyed superior performance compared to the S&P 500 Index, but there are other growth ETFs that perform better.
- SPYG has the highest dividend yield among compared ETFs, but its holdings and weightings put it at a disadvantage compared to SCHG.
Investment Thesis
SPDR Portfolio S&P 500 Growth ETF ( SPYG ) is a buy due to its strong performance, low expense ratio, and comparatively high dividend among growth ETFs. While SPYG warrants a buy rating, investors looking for greater performance at the expense of a lower dividend yield and slightly greater volatility may be more satisfied with Schwab’s U.S. Large-Cap Growth ETF ( SCHG ). While not the highest performing ETF in the growth category, SPYG indicates multiple favorable valuation metrics that drive a buy, even if it lacks the greatest price return.
Fund Overview and Compared ETFs
SPYG is an ETF issued by SPDR State Street Global Advisors that attempts to track the S&P 500 Growth Index. With its inception in 2000, SPYG has 238 holdings and $20.25B in AUM. SPYG’s largest sector weights are on Information Technology (37.28%), Healthcare (16.74%), and Consumer Discretionary (10.56%). While there are numerous ETFs focused on growth, similar competitors in the category used for comparison purposes are iShares S&P 500 Growth ETF ( IVW ), SCHG, Vanguard Growth Index Fund ETF Shares ( VUG ), and Vanguard Russell 1000 Growth Index Fund ETF Shares ( VONG ).
Performance, Expense Ratio, and Dividend Yield
SPYG has enjoyed superior performance compared to the S&P 500 Index, with a 5-year total return of about 80%. The ETF has achieved greater returns than the market due to its greater weight on mega-cap, big tech companies. Although SPYG has multiple advantages in the growth ETF category, it is not the highest performing growth ETF, even among the ones compared in this article. Investors seeking greater performance than SPYG may be more satisfied with SCHG, which has seen a 5-year CAGR of 14.58%.
SPYG 5-Year Price Return Compared to Peer Growth ETFs (Seeking Alpha)
Despite a lagging performance compared to other growth ETFs, SPYG’s redeeming qualities are its expense ratio and dividend yield. SPYG has an extremely low expense ratio at 0.04%, compared to the median of all ETFs at 0.48%. When factoring in its very low expense ratio, there are still other ETFs that perform considerably better than SPYG. SCHG, already mentioned for having greater performance, also has a low expense ratio of 0.04%.
SPYG also has the highest dividend yield of compared ETFs at 1.09%. SPYG’s dividend yield has also been growing for 15 consecutive years along with 5-year dividend CAGR of 6.83%. This is the primary downside for SCHG, which has the lowest dividend yield compared to peer ETFs at 0.46%.
Expense Ratio, AUM, and Dividend Yield Comparison
SPYG | IVW | SCHG | VUG | VONG | |
Expense Ratio | 0.04% | 0.18% | 0.04% | 0.04% | 0.08% |
AUM | $20.25B | $35.50B | $21.41B | $98.96B | $16.11B |
Dividend Yield | 1.09% | 0.96% | 0.46% | 0.56% | 0.71% |
Dividend Growth 3 YR CAGR | 9.18% | 0.92% | 2.47% | -1.28% | -2.13% |
Source: Seeking Alpha, 7 Dec 23
SPYG’s Holdings Versus Competitor ETFs
SPYG has 238 holdings. It should come as no surprise to growth investors that the top two holdings are Apple and Microsoft for all ETFs examined. However, below these top two holdings, differences exist. Any ETF investor likely knows that even small differences in holding weights can play a big role in long-term performance. Several key differences in holdings between SPYG and SCHG are bolded below.
Top Holdings for SPYG and Competitor ETFs (Key Differences Bolded)
SPYG | IVW | SCHG | VUG | VONG |
AAPL (13.59%) | AAPL (13.59%) | AAPL (13.23%) | AAPL (12.78%) | AAPL (12.35%) |
MSFT (7.64%) | MSFT (7.64%) | MSFT (12.83%) | MSFT (11.79%) | MSFT (12.20%) |
NVDA (5.41%) | NVDA (5.40%) | AMZN (6.14%) | AMZN (5.93%) | AMZN (5.81%) |
GOOGL (3.71%) | GOOGL (3.71%) | NVDA (5.26%) | NVDA (5.13%) | NVDA (4.70%) |
GOOG (3.19%) | GOOG (3.19%) | GOOGL (3.60%) | GOOGL (3.90%) | GOOGL (3.57%) |
TSLA (3.18%) | TSLA (3.18%) | META (3.31%) | TSLA (3.39%) | META (3.23%) |
AMZN (2.90%) | AMZN (2.90%) | GOOG (3.10%) | META (3.35%) | GOOG (3.09%) |
UNH (2.45%) | UNH (2.45%) | TSLA (3.10%) | GOOG (3.27%) | TSLA (2.69%) |
LLY (2.26%) | LLY (2.26%) | UNH (2.39%) | LLY (2.31%) | LLY (2.27%) |
V (1.97%) | V (1.96%) | LLY (2.20%) | V (1.80%) | UNH (2.03%) |
Source: Multiple, compiled by author on 7 Dec 23
Of note, there are three primary differences in holdings that will likely result in SPYG lagging SCHG in terms of performance. While historic performance is not always an indicator of future performance, metrics seen with Meta Platforms, Inc. ( META ), Microsoft Corp. ( MSFT ), and Amazon.com, Inc. ( AMZN ) indicate that SCHG will outperform SPYG looking forward. To support this claim, we must look at the expected performance of each of these holdings.
SPYG’s Lack of META
The first primary difference in holdings is META. While SPYG has no weight on META, SCHG has a 3.31% weight. In my opinion, this puts SPYG at a disadvantage to growth ETFs that hold META. META has demonstrated very strong fundamentals recently including a 23.4% net income margin, a 22.3% return on common equity, and a 24.4% YoY EBITDA growth. Despite these strong metrics, META’s forward P/E ratio and forward EV/EBITDA are both 6% lower than its own 5-year average. Therefore, META’s valuation is currently attractive and has one of the biggest buys for me among mega-cap, big tech stocks. Because of these strengths, META will therefore likely propel ETFs that have it as a holding.
SPYG’s Lower Weight on MSFT
SPYG’s lower weight on Microsoft also puts the ETF at a disadvantage. Although Microsoft is SPYG’s second-heaviest holding at 7.64%, this still lags SCHG at 12.83% weight. While Microsoft’s valuation is not currently quite as attractive as META, Microsoft has proven itself as a bastion of mega-cap growth. Furthermore, the company is continuously innovating and remaining at the forefront of relevancy. One example is its cloud computing platform, Azure, which has done well in recent quarters.
SPYG’s Lower Weight on AMZN
Amazon represents the third disadvantage in holdings due to its very strong potential for continued growth and profitability. SPYG has only a 2.90% weight on Amazon, compared to SCHG’s 6.14%. Just earlier this month, Amazon announced a new AI chip for its cloud computing service. The company has taken measures to increase its efficiency and has multiple attractive metrics, making it primed for higher share price. Amazon’s growth has been seen with a YoY EBITDA growth of 40.92% as well as a gross profit margin of 46.24%. Its one-year price performance is over 63% and shows no signs of stopping.
Valuation and Risks to Investors
With a price of $63.10 at the time of this article, SPYG is just shy of its 52-week high of $63.37. However, SPYG is still about 15% below its all-time high of $73.03 seen back on January 3, 2022. Despite climbing 26% YTD, SPYG indicates multiple metrics that drive a buy for me, including its P/E and P/B ratios.
The first positive indicator for me is SPYG’s P/E ratio at 23.31. This is lower than all four growth ETFs used for comparison: IVW (24.62), SCHG (29.74), VUG (32.2), and VONG (30.2). The second positive factor for SPYG’s valuation is its P/B ratio at 6.93. This is also lower than peers: IVW (7.33), SCHG (7.12), VUG (8.2), and VONG (9.9). Finally, SPYG has an attractive estimated 3–5-year EPS growth of 14.37%.
Valuation Metrics for SPYG and Peer Competitors
SPYG | IVW | SCHG | VUG | VONG | |
P/E Ratio | 23.31 | 24.62 | 29.74 | 32.2 | 30.2 |
P/B Ratio | 6.93 | 7.33 | 7.12 | 8.2 | 9.9 |
Source: Compiled by Author from Multiple Sources, 7 Dec 23
Whether SPYG will outperform is dependent on the future performance of its holdings. It is reasonable to predict that while SPYG will outperform the S&P 500 index, it will continue to lag other growth ETFs, particularly SCHG. SPYG’s lack of META and lower weights on MSFT and AMZN will lead to lower performance compared to other growth ETFs. Despite this disadvantage, it is reasonable to predict that SPYG will break its all-time high next year and see returns consistent with its historical CAGR.
The key risk to growth ETFs is the increased volatility compared to the market overall. SPYG has a 5-year beta of 1.11, indicating increased volatility compared to the S&P 500. Of note, this is lower than other compared ETFs: IVW (1.11), SCHG (1.16), VONG (1.13), and VUG (1.18).
Concluding Summary
SPYG warrants a buy due to its record of performance in the growth category of ETFs and its ability to beat the S&P 500. Although it is not the best performing growth ETF, it has the highest dividend of compared growth ETFs along with an extremely low expense ratio. Investors seeking a high-performing growth ETF will likely see higher returns with Schwab’s SCHG ETF due to its superior mix of holdings. Specifically, SCHG holds greater weight on MSFT, META, and AMZN, all of which are primed for continued growth and profitability. Despite this disadvantage, SPYG will likely break its all-time high going into 2024 and see performance at least on par with its own historic returns.
For further details see:
SPYG: Still A Buy, But This Other Growth ETF Is My Top Pick