breaking news SPYG and SPYV ETFs: A Dual Growth and Value Strategy - Business News lastminute news
akinbostancy/iStock via Getty Images
breaking news SPYG and SPYV ETFs: A Dual Growth and Value Strategy - Business News lastminute news
akinbostancy/iStock via Getty Images
akinbostancy/iStock via Getty Images
A comparison of the three-month price performance of the SPDR Portfolio S&P 500 Growth ETF (NYSEARCA:SPYG) and the SPDR Portfolio S&P 500 Value ETF (NYSEARCA:SPYV) in this volatile market shows that the price strategy is currently outperforming. Is. 11% (14.69 – 3.66) as per the chart below. The year-on-year outperformance is even more apparent, but as evidenced by the sporadic volatility in the blue chart, the growth strategy is putting up some resistance.
Data by YCharts
However, this was not always the case and the three-year chart shows that SPYG has outperformed its value peer by over 12%. The question, then, is whether you should maintain your growth portfolio over the long term, or stay in cash by disinvesting completely.
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As I’ll show in this thesis, I believe the answer lies in staying invested in a mix of growth and value, but to begin with, I’ll offer some insight into the macroeconomic environment that currently affects the stock market. is guiding.
Economic Background and SPYG
The Nasdaq Composite, synonymous with high-growth tech companies, has lost nearly 35% of its value since the beginning of this year, with both the S&P 500 and the Dow Jones Industrial Average losing no money, resulting in trillions of dollars being erased. stock market in the last months. As a result, both value and growth investors have suffered.
Some have disinvested from stocks and instead invested in government bonds like the Vanguard Extended Duration Treasury ETF (EDV) because of recession fears, but on the Federal Reserve’s hiking trail, even this The property class is also not secure. Furthermore, the REIT sector hasn’t been spared either, with the Vanguard Real Estate ETF (VNQ), which has lost over 15% since early April.
Rising interest rates aimed at curbing inflation have also depleted liquidity, with signs that the upbeat housing market may be starting to cool. Now, if the economy cools too fast, the Fed will have to adjust, perhaps pausing to hike interest rates. This is generally a positive for growth stocks because they have a higher valuation relative to value stocks. In this case, lower interest rates encourage borrowing, resulting in higher revenue growth and, by Ricochet, increased earnings, which helps tech companies justify their higher valuations.
In this case, with the weighting of some of the largest market caps, as shown in the table below, SPYG only charges 0.04%. These stocks may suffer from low growth and wage inflation is likely to grind away some profits, but, to protect them against the high cost of doing business, they have large cash balances.
State Street Global Advisors (www.ssga.com/)
In addition, since the ETF has lost more than 25% of its value since the beginning of the year, it has become attractive, but far from advising people to spend all their hard earned money buying dips, I’m a fan of one. I recommend a cautious approach such as making a small initial investment and averaging later.
It’s important to take a cautious approach to navigate the tough times ahead.
SPYV appeals amid volatility
There could be more pain in the times to come as the fight against inflation will not be easy with the global supply chain issues related to COVID, as well as components used by communication equipment manufacturers and automakers to produce finished goods. The price also increases. Here, individual companies falling short of their growth targets or providing weak guidance could adversely affect the stock market, as exemplified by Snapchat (SNAP) earlier this week.
Earlier, during Amazon’s (NASDAQ:AMZN) and Target (TGT) earnings calls, investors were shaken by their guidance on expectations of a dramatic reduction in consumer spending. Recently, however, retailer Williams-Sonoma (WSM) exceeded earnings expectations. So it’s a mixed picture in the consumer discretionary sector.
Elsewhere, any expectation that commodities will be price constrained as previous periods of economic uncertainty dashed by Eastern European conflict have contributed to rising oil and natural gas prices. Now, energy stocks like Exxon Mobil (XOM) and Chevron (CVX) offer relatively high dividend returns. Thus, their presence in the SPYV (table below) also explains why the ETF is able to pay a dividend yield of 2.11% while charging a fee of only 0.04%.
State Street Global Advisors (www.ssga.com/)
Analyzing further, the SPYV has an 8% exposure to the energy sector, as shown in the table below, with the underlying stocks helping to partially offset the declines seen in other sectors. Going forward, there are reasons to believe that with its 15% exposure to the financial sector, the ETF could produce an upside.
Combination of growth and value
Major banks look attractive at this time of the economic cycle, as they are well capitalized and reliable compared to 2007-2008, when they were the cause of the Great Recession. The financial sector is currently undervalued and another reason to choose SPYV is the 17.23% exposure it provides to the healthcare sector. At the present time, this sector plays a defensive role in one’s portfolio with names like UnitedHealth (UNH), Merck (MRK) and others. These companies offer products and services that are needed even in tough times as seen during COVID.
State Street Global Advisors (www.ssga.com/)
In addition to defensive stock exposure and with the price strategy currently in vogue, investing in SPYV makes sense. Interestingly, taking into account the total return, i.e. price-performance with dividends (in terms of reinvestment), the value ETF delivered a positive 0.85% return during the previous year as shown below.
Data by YCharts
This is not a very good performance but still respectable given the uncertain market conditions.
Thinking out loud, no one can predict the future, and, unless you’re a trader or are particularly attracted by fast-growing companies, you can have a mixed portfolio, including a few dividend-paying stocks. likely to happen. To be more realistic in this matter, some of us are billionaires like Warren Buffett and based on a 5% dividend yield you need to invest at least two million dollars to earn $100K a year. Combined with the high costs related to taxes and inflation eating up some of this, you may not have much left.
This is why it is important not to ignore growth stocks entirely because they have the potential to promote high performance in a portfolio despite the risk of volatility.
conclusion
To substantiate my statement and as shown in the table below, which is based on $1000 invested in SPYG and $2000 in SPYV respectively, Growth ETFs have the potential to earn you more within the same period . Obviously, I am talking about three and five years of historical performances. Thinking about the long term first ensures those short-term underperformance as shown in red below, when the total amount invested results in a net loss of $3000. Second, it mitigates potential downside risks as a result of any temporary recession as some economists have been envisaging.
Table created by the author using data from (www.seekingalpha.com)
That said, while price appears to be the dominant strategy, with the undervalued stocks that form part of the Dow Jones Industrial Average index providing relatively more consistent performance, the Nasdaq’s sporadic upside -2.5% jump shows. That high-value stocks haven’t capitulated yet. One such instance was on Wednesday amid some news that inflation may be at its peak.
As a result, I recommend a dual strategy involving both the SPYV and SPYG at a 2:1 ratio, with the growth ETF acting as a hedge. Also, for portfolio safety, it is better to start small and gradually add to your investments as the financial conditions unfold. Also, it is due to short-term uncertainty that I am not issuing any buy ratings.
Scanning the investment space, there are other ETFs from Vanguard or Schwab that can hold similar stocks or provide similar sector exposure to these two SPDR ETFs, but I chose them primarily for their lower fees.
Lastly, in the current market conditions, where investors are not fully price oriented, it is important to choose a dual strategy combining both SPYV and SPYG. For this purpose, choosing ETF options avoids the risk of investing in individual stocks, which carry more downside risk in the case of a missed earnings report or poor guidance.
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