ETF Spotlight: The Guggenheim Pure ETFs
Posted on: 09/29/2015
Over the last few months, the investment team here at iSectors has been going through a rigorous research process to fine tune our ETF investment strategies. We want to make sure we have the best possible holdings in our models. (Side note: we haven’t tinkered with the actual structure of each portfolio since the last annual rebalance, but that will come next year.)
As this process has unfolded, there have been certain names that have stood out (more than others). Moreover, some of these funds have recently been implemented in our portfolios over the last few months. Throughout the next few weeks we will put a spotlight on a handful of ETFs that we believe deserve some more attention. Starting with the Guggenheim S&P 500 Pure Growth ETF (RPG) and Guggenheim S&P MidCap 400 Pure Gr ETF (RFG).
The Guggenheim Pure ETFs are so amazingly simple, yet what they offer is unlike anything else that is available in the “traditional” equity ETF space. The two main offerings in the Pure Suite are RPG and RPV, which are the S&P 500 Pure Growth and Pure Value ETFs respectively. These two funds slice up the S&P 500 into two portions: a growth portion and a value portion. Notice, I used the word “portions” instead of “halves.” There are two reasons for this:
- The number of underlying securities in each of the two funds is not equal
- If a certain security in the S&P 500 doesn’t have a strong growth or value score, it can be left out of either fund entirely
For instance, RPG has 107 holdings and RPV has 117 holdings. That means that there are 276 out of the 500 S&P names that are left out of either of these funds because they cannot be classified as either pure growth or value based on the growth and value scores assigned by Guggenheim. Other growth/value ETFs often will have some of the same holdings in both their growth and value funds, albeit with different weightings. Nonetheless, even with the different weightings, it is still slightly counterintuitive that a stock could be considered both growth and value at the same time. Instead of sitting on the fence with this type of stock, Guggenheim will just exclude it altogether, as previously mentioned.
Now you may be wondering what exactly drives the growth scores. It is composed of three factors: internal growth rate, historical earnings-per-share growth, and historical sales growth. This is the right kind of criteria to be used when analyzing growth stocks in our opinion. Once the growth scores are assigned, and the stocks that will be included in the fund are chosen, the holdings are then weighted by the growth scores. The stock with the highest growth characteristics will have the heaviest weighting, and so on and so forth. I won’t speak on the value side of things because here at iSectors we believe in dividend funds as opposed to value funds. There is a plentiful amount of research that could be discussed on that topic, but we’ll save it for another day.
There are actually three pure growth offerings from Guggenheim, the two shown above along with an S&P SmallCap 600 version (RZG). The differentiation between RZG and other “regular” small-cap growth ETFs (IJT for instance), was not enough for us to see any value in switching to the pure growth version. For the S&P 500 and 400, however, there is enough value added for either to replace or complement any existing growth fund allocations, which is exactly what we did in iSectors Domestic Equity Allocation, iSectors Endowment Allocation, iSectors Global Balanced Allocation, iSectors Global Conservative Allocation, iSectors Global Equity Allocation, and iSectors Global Growth Allocation.