Equity: U.S. - Large Cap Growth
Profound fundamental differences exist among competing US large-cap growth ETFs. Index providers have their own style methodologies–unique selection parameters and weighting schemes
“The segment is currently dominated by three funds: IWF, IVW and VUG.” to create growth portfolios. For example, in determining a “growth” stock Russell considers a stock’s projected EPS growth and historical sales growth trend, while MSCI also considers a stocks historical EPS growth and current internal growth. Weighting schemes vary too: Many funds use the classic market-cap weighting scheme but others stray to tiered or proprietary weighting schemes.
While most indexes allow overlap of a company’s weighting between their growth and value indexes, there are a few pure growth indexes that eliminate any overlap between style baskets–a company is either growth, core or value. The Guggenheim S&P 500 Pure Growth (RPG) is one such “pure growth” fund. Its underlying index selects and weights stocks with S&P’s proprietary “growth scores.” Because of its unique “pure growth” selection and weighting scheme, solid tracking and ease of access, RPG is our Analyst Pick for the US large-cap growth segment.
Another differentiator between the ETFs in this segment is their size cutoffs: Some funds include hefty exposure to companies we consider mid-caps while others hew more tightly to large cap securities. The spectrum ranges from funds like PXLG and IWY that hold mostly mega-cap securities to FTC or SYG which allocates 20% or more of assets to mid-cap securities.
By assets, the segment is currently dominated by three funds: the iShares Russell 1000 Growth (IWF), iShares S&P 500 Growth (IVW), and Vanguard Growth (VUG). Combined, they hold about 90% of segment assets, with IWFs $30B in AUM accounting for nearly 40% alone. All three provide a cost-efficient way to gain broad exposure to growth stocks in the Russell 1000 Index, S&P 500 Index and CSRP US Large-Cap Index. New entrants are gaining traction here, with the Schwab U.S. Large Cap Growth (SCHG) and iShares Russell 200 Growth (IWY) making significant strides on the asset front. SCHG charges only 7 bps annually, the lowest in the segment.
Like our MSCI benchmark, a majority of funds have heavy exposures to tech and are often top-heavy in mega-caps like Apple, IBM, Microsoft and Google. A few funds stray though, such as RPG whose top 10 holdings skip most of the tech giants. (Insight updated 01/23/17)
All Funds (19)
IWY $698.21 M 698207510 Heavy in tech
IVW $15.16 B 15161410020 Tilts towards health care
VOOG $1.25 B 1246347750 Tilts towards health care
SPYG $693.49 M 693492745.23073 Pulls from S&P 500
MGK $2.39 B 2389361488.05 Best Fit to our benchmark
IWF $31.9 B 31895670100 Most popular in the segment
VONG $859.2 M 859202432.43 Large holdings base
VUG $23.78 B 23784840428.72 A solid choice for long term investors
JKE $735.14 M 735144720 Tilts heavily toward tech
SCHG $3.46 B 3459979267.2 Cheapest in the segment
PWB $396.65 M 396648900 Concentrated in consumer cyclicals
RPG $1.84 B 1841661034.136 Solid tracking and easy access
FTC $602.41 M 602412100.402 Alpha-seeking
PXLG $131.69 M 131689000 changed indexes May 2015
SYG $12.93 M 12932628.8 Actively Managed
NULG $5.1 M 5096140 N/A
CFGE $27.37 M 27374400.36 poor liquidity so far
RPX $12.38 M 12375412.5 Closure Risk
RWG $5.94 M 5943396.2 Actively-managed
ETF.com Grade as 01/19/17
Equity: U.S. - Large Cap Growth
ETF.com Efficiency Insight
IWF, VUG and IVW are the three most established funds, holding a significant portion of the segments total assets under their belts. As expected, all three funds have high Efficiency
“The lowest scores in Efficiency are seen in alpha-seekers” scores, with VUG being the cheapest of the three at 9 bps and boasting the segment's best tracking (-8 bps). IWF and IVW charge 20 bps and 18 bps, respectively, and both track their indexes exceptionally well. While Vanguard’s newly launched Russell 1000 Index (VONG) and S&P 500 Growth (VOOG) charge 3-5 bps lower than IWF and IVW and track the same underlying indexes, investors have so far shrugged off these cost differences, continuing to favor the liquidity leaders. While Vanguard tends to carry some of the lowest-cost funds, they disclose their holdings on a monthly basis with a 2-week lag, which is not ideal (we like to see daily holdings) and detracts slightly from their Efficiency score.
SCHG performs impressively in Efficiency, charging a segment low expense ratio of 7 bps with excellent tracking as well (-10 bps). Propelled by cost advantage and a solid tracking record, SCHG quickly became the fastest growing fund in a crowded segment (approaching $2B in AUM).
Some of the lowest scores in Efficiency are seen in alpha-seekers like FTC and actively managed funds RWG and SYG. Investors pay hefty annual fees for their better-mousetrap schemes: 70 bps for FTC, 80 bps for RWG, and 60 bps for SYG. To the dismay of tax-conscious investors, RWG paid out $2.6 per share in combined short- and long-term capital gains in 2011. With 15 funds in the segment and over 90% of all assets being held by just three funds, several funds lag significantly in assets. Four funds are below the $150M mark in AUM, with two of those funds holding less than $10M. Investors should closely monitor AUM growth for RWG and SYG. Currently, RWG ($9M in AUM) and SYG ($3M) are at high risk for closure. (Insight updated 01/23/17)
ETF.com Tradability Insight
Five funds in this segment have perfect or nearly perfect scores - IVW, VUG, SCHG, MGK and IWF. But when it comes to sheer liquidity, IWF is in a class of its own. On most days, IWF trades
“When it comes to sheer liquidity, IWF is in a class of its own” over $200M with an average spread of just 1 bp. For institutions and large traders whose primary concern is liquidity, IWF is the go-to fund. While falling slightly behind IWF, IVW and VUG separate themselves from the remaining funds, trading at impressive daily volumes—both over $80M. IVW and VUG also trade with extremely tight spreads of 2 bps–some of the tightest in the segment.
Our Analyst Pick, RPG, has decent on-screen liquidity (over $10M median daily volume) for retail investors with an acceptable average spread at 5 bps. It also has excellent block liquidity for institutional investors trading multiple creation units at a time.
Investors should use caution when trading the smaller and less liquid funds. Many of them trade less than $1M, while a few don’t trade at all on many days. SYG, RWG and CFGE are the most illiquid with average spreads of 35 bps or more. (Insight updated 01/23/17)
ETF.com Fit Insight
In comparing Fit scores between funds in the US Large Cap Growth segment, remember that each index provider has its own style methodology, which can lead to significant tilt and portfolio
“Style methodologies can lead to significant tilt and portfolio differences” holdings discrepancies against our MSCI benchmark. While most indexes allow companies with growth and value characteristics to overlap their weightings between growth and value indexes, some implement pure style strategies that eliminate overlap by allocating each company’s weight to one of growth, core or value.
Initial selection universes also impact the final portfolios; for example, IWF holds over 600 names, as it selects growth stocks from the Russell 1000 Index, whereas IWY only holds around 130 names, as it pulls growth stocks from a smaller universe–the Russell Top 200 Index. Despite its underlying index change in April 2013, MGK continues to be the segment leader in Fit due to a high level of portfolio overlap and similar weighted avg. market cap. MGK now tracks a CRSP index which selects stocks based on several growth factors, including historical and future EPS growth, sales per share growth, investment-to-assets ratio and return on assets. It makes our Opportunities List as a result of its unique growth factor screen.
Funds tracking Russell and S&P indexes, like segment leaders IWF and IVW, have minor differences in portfolio composition. For example, S&P-based funds tend to have a larger healthcare tilt vs. our benchmark. Still, most growth funds have one thing in common—heavy tech exposure as giants like Apple, IBM, Microsoft, and Google often dominate top holdings.
RPG, a pure growth fund based on the S&P 500 Index, also has a very different portfolio from its peers due to its unique selection and weighting scheme based on growth scores. RPG is heavy in financials, consumer cyclicals, and healthcare with names like D.R. Horton, Southwest Airlines and Lennar among its top holdings.
The true alpha-seekers are another story. By design they deviate substantially from the neutral benchmark. RWG, one of the three actively managed funds in the segment, holds the lowest Fit score thanks to its inclusion of ADRs of foreign companies listed in the US like Chinese search engine Baidu. (Insight updated 01/23/17)