Beating SPY With Pure Style S&P 500 ETFs

March 02, 2015

Matthew Tuttle is a big believer in tactical investing, and a fan of “smart beta approaches. One of his preferred strategies is to combine pure style S&P 500 ETFs—one focused on growth, the other on value—to outperform long exposure to the SPDR S&P 500 (SPY | A-98) year after year. He has also been busy readying his own set of tactical ETFs, the first of which launched this week, the Tuttle Tactical Management U.S. Core ETF (TUTT)


The CEO of Tuttle Asset Management, which has some $215 million in assets under management, tells us why his strategy is working, and why smart beta trumps market capitalization when it comes to ETFs. You prefer to own exposure to S&P 500 stocks by combining the Guggenheim S&P 500 Pure Growth ETF (RPG | A-62) and the Guggenheim S&P 500 Pure Value ETF (RPV | A-58) rather than owning something like SPY. Why?


Matthew Tuttle: We are 100 percent tactical, so we can be 100 percent in the market or out of the market, and everywhere in between. Where we add value is in trying to figure when it makes sense to be in the market and how much.


To me, that’s a huge part of the equation, but I want to add more to that. I’m a big fan of “smart beta,” and there’s no rule that a market-cap-weighted index is the best way to go. If I can find better ways to slice and dice the space that can give me better returns, I will use them.


The S&P 500 is a blend of growth and value stocks, but it’s really an inefficient blend. Guggenheim’s research has shown that there are a lot of stocks that fall into the growth camp, but they are really part growth, part value.


And many that fall into the value camp that are part value, part growth. What I love about Guggenheim’s pure style is that it strips out the in-between guys, and then it weights the value side by value characteristics, and the growth side by growth characteristics.


The beauty of a blended index like the S&P 500 is that sometimes growth is doing better, sometimes value is doing better. If you are 50/50 in both, it shouldn’t matter. An approach that does value and growth better should theoretically be better, and the numbers have proven that.


We also like the Guggenheim S&P 500 Equal Weight ETF (RSP | A-81) as an alternative. Does that mean that these companies that fall in the in-between category drag down returns? In a simplistic way, it sounds like the mix excludes these names.


Tuttle: It does, but the weighting is important. The S&P 500 weights by market cap, where RPG weights by growth. So the most “growth-y” stock gets the biggest weighting. Same with RPV. Theoretically, when value stocks are in favor, RPV should do better than the value side of the S&P 500, and when growth stocks are in favor, RPG will do better. How long have you been using this strategy? Would you give me a tangible example of how it has performed for you relative to SPY?


Tuttle: We’ve been using RPV and RPG for about two years or so, and combining RPG and RPV has averaged out about 200 basis points in outperformance over SPY on an annual basis. Under what circumstances would you use the Guggenheim S&P 500 Equal Weight ETF (RSP | A-81), then?


Tuttle: I use RSP because I like diversifying my smart beta bet. Over time, RPG and RPV blow the S&P 500 away, but day to day, month to month, it’s going to vary. I like throwing RSP into the mix because in there, every stock in the index has an equal impact. In the S&P 500, the 500th stock barely matters. Sometimes that’s fine, but equal weighting really provides diversification.


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