MW How GMO's ETF is beating the S&P 500 this year - without Nvidia
By Christine Idzelis
Here's what's driving GMO U.S. Quality ETF's gains in 2024, and some recent changes to its holdings, says the fund's lead portfolio manager
GMO's first exchange-traded fund is beating the S&P 500 so far in 2024 - without holding the skyrocketing stock of artificial-intelligence darling Nvidia Corp.
Shares of the GMO U.S. Quality ETF QLTY have gained 9.5% this year through Friday, beating all three major U.S. equity indexes, according to FactSet data. The S&P 500 SPX has risen 7.5% over the same period, while the technology-heavy Nasdaq Composite COMP has advanced 7.6% and the Dow Jones Industrial Average DJIA has increased 2.6%.
The actively managed GMO U.S. Quality ETF has amassed around $600 million of assets under management since launching in November. The fund is the first ETF launched by GMO, the investment firm co-founded by legendary investor Jeremy Grantham.
It's generally tough for stock pickers managers to consistently beat their benchmarks, with S&P Dow Jones Indices finding that in 2023 a majority of active large-cap U.S. equity funds lagged the S&P 500 for a 14th straight year. The S&P 500 is benefiting again this year from massive gains from Nvidia $(NVDA)$ and other megacap stocks known as Big Tech.
"A lot of the winners this year have been AI related just across the market generally," said Tom Hancock, head of focused equity at GMO and lead portfolio manager of the GMO U.S. Quality ETF, in a phone interview. "We have good exposure there."
Big Tech stocks Microsoft Corp. $(MSFT)$ and Google parent Alphabet Inc. $(GOOGL)$ are the top two holdings of the GMO U.S. Quality ETF. The fund has exposure to other megacap names in that category, including Facebook parent Meta Platforms Inc. (META), Amazon.com Inc. $(AMZN)$ and Apple Inc. $(AAPL)$, according to data from GMO's website on Monday.
But chip maker Nvidia - which based on Monday afternoon trading has outperformed other Big Tech stocks with a huge gain so far this year of more than 85% - is not held by GMO's ETF. Nvidia's stock has soared on investor enthusiasm surrounding developments in AI, sending its market value to around $2.2 trillion.
"It's a quality company but there are valuation concerns for us, and other places we think we can get that exposure cheaper," said Hancock." There's a pretty big ecosystem" in AI.
For example, the GMO U.S. Quality ETF's holdings include Broadcom Inc. $(AVGO)$, which makes custom AI chips, as well as semiconductor equipment companies Lam Research Corp. $(LRCX)$ and KLA Corp. $(KLAC)$, according to Hancock.
Shares of KLA have surged around 23% so far this year, while Lam Research is up around 18% year to date, based on Monday afternoon trading levels.
Meanwhile, Meta has surged about 31% so far in 2024, while Amazon is up around 23%, Alphabet has climbed almost 20% and Microsoft has advanced nearly 10%, according to FactSet data, at last check.
But shares of Apple are down around 6% this year as of Monday afternoon, a drop that created a buying opportunity for GMO.
The firm's ETF added shares of Apple to its portfolio over the past month or so, said Hancock. He expects that artificial intelligence will drive an upgrade cycle for the iPhone, which he described as a "powerful" platform that he anticipates people will use to access AI.
'Not just about AI'
"It's not just about AI" when it comes to gains this year for the GMO U.S. Quality ETF, according to Hancock.
"GE has been a strong performer," he said, pointing to the transformation this year of General Electric Co. from a conglomerate to a business that is focused on jet engines. Shares of GE Aerospace $(GE)$ are up almost 65% this year based on Monday afternoon trading.
Meanwhile, "healthcare is a very big exposure for us," said Hancock, and an "area where we're seeing a lot of opportunity generally." He cited Johnson & Johnson $(JNJ)$ and UnitedHealth Group Inc. $(UNH)$ and Eli Lilly and Co. $(LLY)$ as stocks held by the GMO U.S. Quality ETF in the sector.
Johnson & Johnson and UnitedHealth are down so far in 2024. But Eli Lilly has been a strong performer in the ETF's portfolio this year, he said, citing investor interest in its weight-loss drug Zepbound. Shares of Eli Lilly are up around 31% so far in 2024, based on Monday afternoon trading levels.
Meanwhile, GMO added Thermo Fisher Scientific Inc. $(TMO)$ to its portfolio earlier this year as "a way of playing biotech innovation without having to bet as much on a specific outcome," said Hancock. "They are picks and shovels to the industry."
Fed's rate path?
GMO's ETF pursues a "quality core" strategy, with a concentrated mix of growth and value stocks, including a "fair amount" of more defensive bets such as Coca-Cola Co. $(KO)$ within consumer staples, according to Hancock.
But he said the fund, which holds a total 35 stocks, doesn't try to time economic cycles, even if market participants watch closely for fresh data pertaining to the U.S. economy.
Take Friday, when investors assessed the softer-than-expected U.S. jobs report for April. The stock market rose sharply that day, a paradoxical situation in which "bad news is good news" for the market, said Hancock.
Investors appeared to cheer softer jobs data for April, viewing it as a "Goldilocks" report that kept alive both hopes for a soft-landing for the U.S. economy and potential rate cuts this year by the Federal Reserve.
Read: U.S. stocks rally on 'Goldilocks' jobs report as Wall Street's fear gauge slides
But the GMO U.S. Quality ETF looks for companies with "a great long-term trajectory" that may be followed within reason regardless of where rates and the economic cycle are, said Hancock. "We try to decide whether it really is a cycle versus a secular trend," he said.
"As long as we think it's a cycle, we don't try to forecast it," said Hancock. "Whether interest rates go up or down 50 basis points is not going to affect how big the AI opportunity is four or five years from now."
GMO's ETF, which has an expense ratio of 0.5%, traded up 1.1% on Monday. That compares with a 1% gain for the S&P 500 index.
-Christine Idzelis
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
May 06, 2024 16:15 ET (20:15 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
Comments