Growth ETFs Diverge Significantly After S&P Rebalance

The rebalancing resulted in the growth indexes being overweight in energy and healthcare.

Reviewed by: Lisa Barr
Edited by: Sean Allocca

How have growth exchange-traded funds performed this year, and have they outperformed value ETFs? It’s a fundamental question investors typically ask as they assess the investing environment. In 2023, the answer can vary dramatically, depending on the ETF one selects.  

Through Feb. 27, 2023, the three largest growth ETFs in the U.S. had significantly different returns. The Vanguard Growth ETF (VUG) tracks the CRSP U.S. Large Cap Growth Index and is up 8.93% this year through Feb. 27, 2023. In contrast, the iShares S&P 500 Growth ETF (IVW) is up only 3.98% in the same period, a significant 4.95% differential between two ETFs that both provide exposure to U.S. large cap growth stocks. 


Figure 1: YTD Total Return of the Three Largest Growth ETFs in the U.S. 

Source: CFRA ETF Database; data as of Feb. 27, 2023 


Value-Growth Differential Varies Dramatically by Index Family 

The divergence between ETFs based on the underlying index family also extends to value-oriented ETFs. In fact, there are dramatically different differentials between growth and value depending on which indexes an ETF tracks.  

Figure 2 shows the value-growth differentials for pairs of Vanguard ETFs that have different index providers. In the U.S. small cap equity space, the Vanguard Small-Cap Growth ETF (VBK) is outperforming its value counterpart Vanguard Small-Cap Value ETF (VBR) by 2.2%, both of which track CRSP indexes.  

However, Vanguard’s U.S. small cap ETFs that track S&P indexes have value (the Vanguard S&P Small-Cap 600 Value ETF; VIOV) outperforming growth (the Vanguard S&P Small-Cap 600 Growth ETF; VIOG) by 3.94%. This is a very significant 6.15% swing for the same asset class due to different underlying indexes.  


Figure 2: Value-Growth Differential by Index Family for Vanguard U.S. Equity ETFs  

Source: CFRA ETF Database; data as of Feb. 27, 2023 


Impact of S&P’s Growth Methodology and Index Rebalancing  

The variance in value-growth performance differential can be explained by methodology differences between the indexes’ underlying various ETFs.  

CRSP, an index provider for several Vanguard ETFs, uses earnings per share, future short-term EPS growth, three-year historical EPS growth, three-year historical sales per share growth, current investments to assets, and finally, return on assets as factors when determining growth scores for stocks. Similarly, S&P uses change in EPS and sales per share. Importantly, however, S&P also includes momentum (i.e., 12-month percent price change) as a growth factor.  

The presence of price momentum in S&P’s growth methodology is a significant explanatory variable of performance differentials with other index providers. In 2022, energy was the best-performing GICS sector, and energy stocks scored high on momentum.  

Consequently, several energy firms moved from S&P’s value to growth indexes during S&P’s December 2022 rebalance. Further, a stock like Meta Platforms, typically viewed as growth oriented, migrated from growth to value. 

This rebalancing resulted in the S&P growth indexes being overweight in energy and health care and underweight in IT and communication sservices relative to indexes from Russell and CRSP.  

This can be seen in Figure 3, where VUG, which tracks a CRSP growth index, has a higher weight to IT, communication services and consumer discretionary compared with VOOG, which tracks an S&P growth index. Since these sectors have performed well in 2023 year to date, ETFs tracking CRSP indexes have outperformed growth ETFs tracking S&P indexes.  


Figure 3: Sector Comparison for a CRSP-based ETF (VUG) vs an S&P-based ETF (VOOG)  

Source: CFRA ETF Database; data as of Jan. 31, 2023 


S&P Rebalance

Investors often search and compare ETFs based on asset class or strategy, expense ratio and fund sponsor. However, as we have seen with growth and value ETFs in 2023, the methodology of the indexes’ underlying ETFs can also play a significant role in determining investor returns. These recent trends reinforce the importance of analyzing index methodologies and the resultant sector implications when evaluating and selecting ETFs. 

Aniket Ullal heads CFRA’s ETF data and analytics business. He has worked in the ETF industry since early in its development. Ullal founded First Bridge, one of the industry’s leading ETF data sets that was acquired by CFRA in 2019. Previously, he was the product head for U.S. index products at S&P Dow Jones Indices.