SPYG: S&P 500 Growth Stocks Are Pricey, But Still Worth It

seekingalpha07-06

MF3d Investment Thesis The SPDR S&P 500 Growth ETF (NYSEARCA:SPYG) is expensive and hyper-concentrated, currently trading at 30.75x forward earnings with 35.80% allocated to just three stocks: ...

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However, that's par for the course for most large-cap growth funds, and SPYG's factor mix is about as good as you'll find in its category. While waiting for a pullback is tempting, I suggest investors always maintain at least some exposure to growth stocks, and in my opinion, SPYG is currently a solid choice despite its price momentum screen, which has previously worked against shareholders. As I will demonstrate below, SPYG's growth, value, and sentiment features are strong, and based on this information, I have decided to rate SPYG a solid \"buy\". I hope you enjoy the review. SPYG Overview Strategy Discussion SPYG is one of three ETFs to track the S&P 500 Growth Index. The two others are the Vanguard S&P 500 Growth ETF (VOOG) and the iShares S&P 500 Growth ETF (IVW). As shown below, SPYG is well-established with $29.28 billion in assets under management and, compared to VOOG and IVW, has the lowest expense ratio at 0.04%.   Seeking Alpha This table also includes the statistics for the Schwab U.S. Large-Cap Growth ETF (SCHG), the iShares Russell 1000 Growth ETF (IWF), and the iShares Russell Top 200 Growth ETF (IWY), three other well-established ETFs whose fundamentals I will evaluate today. However, let's first discuss SPYG's Index screening process. It begins by assigning growth and value scores for each S&P 500 Index member based on the following screens:  Three-year net change in earnings per share over current price. Three-year sales per share growth rate. Twelve-month price change percentage. Book value to price ratio. Earnings to price ratio.  You might assume the S&P 500 Growth Index only considers the first three growth-related metrics, but that's not true. S&P Dow Jones Indices creates style baskets by ranking each stock on all six metrics, so the result is that growth stocks must also score relatively poorly on the three value metrics. Put differently, the S&P 500 Growth Index selects stocks with high growth rates, strong price momentum, and high valuations. That's the purpose, so the argument that SPYG is \"pricey\" will always exist by design. However, that doesn't mean investors should ignore valuation entirely, and it also doesn't mean investors should ignore consensus growth rates. You'll notice these screens are all backward-looking, so it's not guaranteed they will align with current market conditions. I see this as a potential weakness, so I'm always careful to assess estimates in my analysis. Performance and Composition Analysis The following table highlights selected periodic returns for SPYG and other ETFs in the large-cap growth category as of June 30, 2024. These are total returns with dividends reinvested and sourced from Portfolio Visualizer, as shown in this example.   The Sunday Investor SPYG, VOOG, and IVW have tripled in value over the last decade, with SPYG's 300.33% total ten-year return slightly better due to its lower expense ratio. However, the alternatives I mentioned earlier have much better track records, with IWY gaining 403.53% over the last decade while SCHG is up 352.01%. These figures suggest SPYG is inferior, but I caution against that assumption. Based on its current holdings, there's not much separating them anymore.   The Sunday Investor SPYG's top 25 holdings comprise 73.08% of the portfolio, but SCHG and IWF have virtually the same exposure to these stocks at 72.73% and 73.67%, respectively. IWY is the outlier at 81.48%, but ironically, much is due to a higher allocation to Amazon (AMZN), a stock with below-average three-year sales and earnings per share growth rates. Therefore, when it comes to which ETF does a better job selecting growth stocks, it's hard to name a clear winner. As for why SPYG has historically underperformed, my best guess is its one-year price return screen, a feature I believe has worked against the fund. For example, Amazon declined by 49.62% in 2022, a result so bad that it led to its removal from the S&P 500 Growth Index and entry into the S&P 500 Value Index. Unfortunately for SPYG, Amazon gained 80.88% the following year, and had this screen not been present, SPYG shareholders likely would have been much better off. Between January 2022 and December 2023, SPYG declined by 8.23%, while SCHG, IWF, and IWY earned small gains.   Portfolio Visualizer SPYG Analysis Fundamentals By Company The following table highlights selected fundamental metrics for SPYG's top 25 holdings, totaling 73.08% of the portfolio. I've also included summary metrics for SCHG, IWF, IWY, and the SPDR S&P 500 ETF (SPY) at the bottom.   The Sunday Investor Here are three observations to consider: 1. SPYG trades at 32.98x forward earnings using the simple weighted average method and 30.75x using the harmonic weighted average method, which gives smaller stocks more influence. Regardless of your preferred method, SPYG's valuation is slightly cheaper than many large-cap growth ETFs, including those listed above. Furthermore, its trailing P/E ranks #31/70 in its category, so unless you're willing to make huge sacrifices on growth with ETFs like SPGP or QQQE, there aren't too many choices. Therefore, while SPYG may be too pricey, that argument is only relevant to investors looking to change their asset allocations, perhaps by swapping SPYG for a large-cap value alternative. This strategy isn't necessarily better. SPYG's 7.01/10 EPS Revision Score is stronger than SPY's 6.62/10 and, by extension, much better than the 6.00/10 score for the SPDR S&P 500 Value ETF (SPYV). In addition, SPYG's current holdings beat sales and earnings expectations by 1.44% and 6.99% last quarter compared to 1.21% and 6.47% for SPYV. These numbers indicate that growth stocks remain solid bets and that calls for rotation to value are premature. This wasn't the case when I last reviewed SPYG in February 2022, shortly before its decline began. 2. Since SPYG relies on historical screens, it's no surprise to see its selections generally have solid sales and earnings per share growth rates. Over the last three years, SPYG's annualized growth rates based on current holdings are 18.68% and 19.40%, respectively, a combination better than the three growth peers listed. We see a slight weakness in one-year estimated sales (14.23%) and one-year estimated earnings per share (18.87%), but overall, SPYG looks quite solid on growth factor. Here is a more comprehensive table highlighting these historical- and forward-looking growth rates compared to a larger category sample, sorted by one-year estimated EPS growth.   The Sunday Investor Higher growth ETFs are available, but they also have higher valuations. It just depends on how aggressive you want to be, but I take some comfort knowing that SPYG, albeit indirectly, has some built-in valuation screens. 3. Using the following formula, I calculated each stock's annual price position to illustrate how far they are trading from their 52-week high and low prices: [Current Price - 52 Week Low] [52 Week High - 52 Week Low] SPYG's weighted average result was 85.47%, and as shown in the table above, Apple is trading at its 52-week high price with a 100.00% result. Microsoft (MSFT), Alphabet (GOOGL), and even Costco Wholesale (COST) are close, but remember that also applies to SCHG, IWF, IWY, and many other large-cap growth ETFs. Currently, alternatives with the weakest price momentum include the VanEck Morningstar Wide Moat Growth ETF (MGRO) and the Invesco S&P 500 GARP ETF (SPGP) at 52.48% and 59.70%. Still, as shown in the previous table, these have much lower estimated earnings growth rates. There is, unsurprisingly, no free lunch. Investment Recommendation  I have rated SPYG a \"buy\" based on its current composition. Its growth rates are competitive with alternatives like SCHG, IWF, and IWY, and it trades at a slightly cheaper valuation than these peers. Recent earnings results and consensus estimate changes suggest growth stocks are still preferable over value stocks. Furthermore, since most current holdings are trading close to their 52-week high prices, there should be few changes related to the Index's price momentum screen at the end-of-year rebalancing. In my view, this screen is a weakness, but barring any significant collapse in the price of its top holdings, I think it has an above-average chance of outperforming its peers in the short- to medium-term. Thank you for reading, and I look forward to answering any questions you have in the comments below.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":1,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.0","shortVersion":"4.29.0","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2449229672"}