Parsing Size & Style

June 06, 2012

When looking for the right growth fund, it’s easy to just focus on the growth factors used to select growth stocks.

But growth factors don’t tell the whole story.

The graph below shows four major U.S. large-cap growth ETFs over the past year: the SPDR S&P 500 Growth ETF (NYSEArca: SPYG), Vanguard Russell 1000 Growth ETF (NYSEArca: VONG), iShares Russell Top 200 Growth Index Fund (NYSEArca: IWY) and Vanguard Mega Cap 300 Growth ETF (NYSEArca: MGK).

Growth Dispersion

There’s a 4.1 percentage point difference between the top performer, IWY, and the bottom, VONG.

Some of this difference is driven by slightly different growth factors; for example, VONG looks at book-to-price ratios, medium-term growth forecasts and historical sales-per-share growth, while IWY only uses the latter two factors.

A lot of it, however, is driven by the very different “large-cap” indexes that they choose their securities from. IWY chooses growth stocks from the Russell Top 200 Index which, as the name implies, comprises the 200 biggest U.S. equities by market value.

In contrast, VONG draws growth stocks from the Russell 1000, which holds the 1,000 biggest U.S. equities. That means that its “large-cap growth” holdings actually include a lot of mid- and small-cap growth holdings, and these mid- and small-cap holdings behave differently than their larger brethren.

Does it make a difference? Yes.

Let’s look at the parent indexes. The graph below shows the SPDR S&P 500 ETF (NYSEArca: SPY), Vanguard Russell 1000 ETF (NYSEArca: VONE), iShares Russell Top 200 Index Fund (NYSEArca: IWL) and Vanguard Mega Cap 300 ETF (NYSEArca: MGC).

Large-Cap Dispersion

This graph, unsurprisingly, looks a lot like the large-cap growth ETF above it. Here, IWL beats VONE by about 2.4 percentage points, with the other two ETFs in the middle.

Over the past years, large companies have outperformed small, which is captured by both the broad large-cap funds and the growth-focused ETFs that are based upon them.

Now, with all that said, there can be very significant differences between growth ETFs that are based upon the same parent index.


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