How ‘Pure’ ETF Strategies Crushed the Market


The US stock market has delivered a stellar performance this year as investors have been pouring money into equities, ignoring lackluster earnings and sluggish economic growth. The main force behind the surge has undoubtedly been the massive support by the Fed, which made equities much more attractive compared to most other asset classes.

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Encouraged by the positive market scenario, investors have put a lot of money into equity ETFs this year. Through the end of October, US listed equity products attracted a total net inflow of $138 billion. While most of these inflows went into plain-vanilla market capitalization weighted equity products, products based on “advanced” stock selection methodologies have seen an increasing interest of late.

With the recent surge and market indexes at all-time highs, it is quite likely that market returns in the coming months will not be as spectacular as they have been in the past few months. Therefore the investor interest in market beating startegies is likely to go up. (Read: 3 ETFs that Maximize Shareholder Value)

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Some of these strategies that provide more focused approach to a particular investing style have been quite successful in beating the market consistently. With their unique approach, they may continue their outperformance going forward as well.

‘Pure’ Approach to Growth and Value Style

Dividing the entire universe of stocks into ‘growth’ and ‘value’ buckets and then selecting stocks based on one’s investment objectives and risk tolerance remains the most popular approach to investing. (Read: 4 Ways to Grow Dividends with ETFs)

Many critics argue that such a distinction is flawed, and in fact the distinction between these two styles is often vague and there is considerable overlap between the two styles. S&P 500 pure style indexes divide one third of S&P 500 market capitalization as ‘Pure Growth’ and one third as ‘Pure Value’. These two buckets have no overlapping stocks. Index constituents are weighted by their style scores as opposed to market cap.

Growth stocks are selected on the basis of three factors: sales growth, the ratio of earnings change to price and momentum.  Value stocks are selected on the basis of three ratios: book value to price, earnings to price and sales to price. (Read: High Quality ETFs for Long Term Outperformance)

Both ‘pure growth’ and ‘pure value’ strategies have significantly outperformed the broader market as well as their market-cap weighted growth and value counterparts.

Guggenheim S&P 500 Pure Value ETF (RPVETF report)

RPV tracks the S&P 500 Pure Value Index holding 111 securities in its basket and charging investors 35 basis points a year in fees.

Top sectors currently are Financials (35%), Energy (13%) and Healthcare (11%). The fund is also well diversified among holdings with the top holding accounting for just 3.5% of total assets.

The fund has managed to attract about $446.7 million in assets so far only despite its outstanding performance.

The product has returned a very impressive 41.3% year-to-date compared with 27.9% for S&P 500 Value Index ETF (IVEETF report). The performance has been nothing less than stellar over the longer term as well, with a total return of 286.3% return compared with 136.3% for IVE in the last five years.


Guggenheim S&P 500 Pure Growth ETF (RPGETF report)

Launched in March 2006, RPG tracks the S&P 500 Pure Growth Index, with a total of 110 stocks in its basket. The product is widely spread across individual securities, with the top security accounting for just 2.6% of the asset base. The top three sectors are Consumer Discretionary (29%), Healthcare (19%) and Information Technology (16%).

The product charges a reasonable expense ratio of 35 basis points. It has so far managed to attract assets of $809.9 million.

This product had a total return of 243.7% compared with 152.3% for the iShares S&P 500 Growth ETF (IVWETF report) in the last five years. The outperformance has continued this year as well with a return of 36.6% compared with 27.1% for IVW.


The Bottom Line

Given their focused approach and solid performance, these pure style ETFs are definitely worth a look, even though they are slightly more expensive than their simpler cap weighted counterparts. They are excellent choices for investors seeking a play on strongest growth or value characteristics.

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