Courtesy Everett Collection
In the current economic environment, should investors looking to beat the overall market employ a value-based strategy, favoring companies that are trading at a discount, or a growth one, looking at the names that have already been doing well? What if there’s less difference between the two than you might expect?
As the broader market appears to be entering a period where value may be better positioned than growth—following a decadelong run of losing to both growth and the overall market—investors hoping for exposure to one strategy over the other should be careful: There’s a notable degree of overlap between two widely used exchange-traded funds that offer exposure to these strategies, an issue that could muddle their efficiency in diversifying one’s portfolio.
Six companies appear in the top 20 holdings of both the iShares S&P 500 Value ETF /zigman2/quotes/206097129/composite IVE +2.69% , which has $13.4 billion in assets, and the $18 billion iShares S&P 500 Growth ETF /zigman2/quotes/208542267/composite IVW +1.04% . The six stocks are: Johnson & Johnson /zigman2/quotes/201724570/composite JNJ -1.21% , General Electric Co. /zigman2/quotes/208495069/composite GE -0.27% , Procter & Gamble Co. /zigman2/quotes/202894679/composite PG +2.42% , Verizon Communications Inc. /zigman2/quotes/204980236/composite VZ +0.92% , Pfizer Inc. /zigman2/quotes/202877789/composite PFE +2.27% , and Philip Morris International Inc. /zigman2/quotes/201611010/composite PM +2.79% . The sextet accounts for 6.65% of the growth fund’s portfolio and 6.98% of the value fund.
Beyond the top 20, the overlap between the two iShares funds is about 28%, according to Michael Venuto, chief investment officer at Toroso Investments, who developed software that analyzes overlap between different funds. To compare, there’s only a 5% overlap between the growth /zigman2/quotes/209170287/composite VUG +1.11% and value /zigman2/quotes/209486178/composite VTV +2.67% funds issued by Vanguard, another major fund provider.
BlackRock /zigman2/quotes/207946232/composite BLK +4.22% , which owns the iShares suite of funds, couldn’t be immediately reached for a comment.
“Vanguard is definitely more pure—it is focused on just growth or value, whereas the iShares approach is more about tilting towards one or the other, not being exclusionary,” Venuto said. “If you’re using them to balance each other out, that wouldn’t work. You need to be sure that the portfolio you’re constructing looks the way you want it to; just because you’re using ETFs, that doesn’t mean you’re not a stock picker still.”
The overlap hasn’t meant that the value and growth funds see the same performance. The iShares growth fund is up 14.5% thus far this year, while the value fund is up 4.9%. However, the two did have a narrower gap in performance than the Vanguard products, where the value fund is up 5.4% in 2017 and the growth one is up 15.8%.
Such “smart beta” funds screen an underlying index—the S&P 500 in the case of iShares—for names that meet its inclusion criteria. A value fund, for example, might look at such metrics as price-to-earnings and price-to-book and buy the names that appear undervalued on these scores. (There are 319 holdings in the growth ETF and 351 in the value fund.) That a stock appears in both funds doesn’t necessarily reflect a problem with the way the funds are constructed; companies can have attributes of both.
In the case of Johnson & Johnson, “the idea that it’s both growth and value is interesting,” Venuto said. “It is a major part of the consumer space, which is growing, but at the same time it’s also an old-school established dividend play.”
Apple Inc. /zigman2/quotes/202934861/composite AAPL +0.18% is a notable example of this phenomenon. The iPhone maker’s stock is up more than 26% thus far this year, more than twice the 9.5% advance of the overall S&P 500 /zigman2/quotes/210599714/realtime SPX +1.74% . That, along with Apple’s sales growth, is enough that it can be easily argued as a growth name. However, Apple’s price-to-earnings ratio is 17.12, below the P/E of the S&P 500 at around 22. That boosts the argument that it is a value play.
Apple is a major presence in both growth and value-based strategies. It is by far the largest component of the iShares Edge MSCI USA Value Factor ETF /zigman2/quotes/210105323/composite VLUE +2.58% , comprising 9.6% of the portfolio. It is also the largest holding of Vanguard’s Mega Cap Growth ETF /zigman2/quotes/208086263/composite MGK +0.79% , comprising 8.19% of the holdings.
“There’s definitely a difference of opinion on what it should be, since it is a massive weight in both funds,” Venuto said. “But what I need to know is, how much Apple will I own if I put these funds together, and how will that compare to the broader market, which I can access for cheaper?”
Both the iShares value and growth ETF charge an expense ratio of 0.18%, more than three times the 0.04% fee of the iShares Core S&P 500 ETF /zigman2/quotes/204263249/composite IVV +1.81% .