These Sectors Dominate Growth, Value ETFs

Exchange traded funds dedicated to a single investment factor can take on sector bets that are often significantly larger than broad market funds.

Sector concentration is particularly prevalent in growth and value ETFs. The sectors that often dominate those funds are technology (growth) and financial services (value).

What To Know

Growth stocks have been trouncing their value rivals for over a decade due in large part to the global financial crisis taking a heavy toll on the financial services sector. While no sector was immune to the crisis, its aftermath was punitive for the financial services sector.

From 2014 through 2017, the S&P 500 Technology Index outperformed the equivalent financial services index in three of four years and appears poised to do the same again this year.

“Although the trend remains intact so far in 2018, a recent uptick in volatility left many investors wondering if value might be in line for a comeback,” S&P Dow Jones Indices said in a recent note. “Indeed, value outperformed in October and November as many growth-oriented stocks came under pressure from investors looking to take risk off the table. While it remains to be seen if this nascent trend is here to stay, historical sector exposures may be useful for assessing the relative prospects of growth and value.”

Why It's Important

The iShares S&P 500 Growth ETF IVW, which tracks the S&P 500 Growth Index, devotes 31.52 percent of its weight to tech stocks. By comparison, the fund's second-largest sector weight, health care, represents just 18.12 percent of the fund's weight. Three of IVW's top 10 holdings are technology stocks. IVW has $20.41 billion in assets under management.

The $14.71 billion iShares S&P 500 Value ETF IVE, which tracks the S&P 500 Value Index, has a financial services weight of 22.31 percent. That's more than 1,000 basis points above its second-largest sector allocation, which is also health care.

Year-to-date, IVE is down almost 6 percent while IVW, the growth ETF, is up almost 3.6 percent.

What's Next

For over two decades, financials have loomed large in the value index while technology has dominated growth benchmarks. That sector exposure had significant impacts on returns attributable to growth and value stocks.

“This result held across all three time frames, capturing 1) the run-up to the height of the Tech bubble (Jan. 1995 to Mar. 2000); 2) the subsequent bursting of that bubble and the run-up to the Global Financial Crisis (Apr. 2000 to Dec. 2007); and 3) the Global Financial Crisis and the most recent bull market in U.S. equities (Jan. 2008 to Nov. 2018),” according to S&P Dow Jones.

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