HomeBusinessGrowth ETFs Get a Wake-Up as Technology Gains Value Blush

Growth ETFs Get a Wake-Up as Technology Gains Value Blush

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ETFs like the $58.5 billion iShares S&P 500 Growth ETF (IVW) are getting a new makeover as high-flying tech stocks, including Apple Inc. and Amazon.com Inc., are no longer considered pure grow according to the indexes that the funds track, according to CFRA Research.

Microsoft Corp. and Adobe. Inc. are also among the companies no longer categorized as pure growth under S&P Global’s latest growth-to-growth rebalance. value indexes, wrote Aniket Ullal of CFRA. These companies, along with Advanced Micro Devices Inc., now fall into both camps.

Dozens, if not hundreds, of exchange-traded funds and mutual funds track the S&P indexes when selecting stocks for their funds, and the company often changes the weights of the indexes – or rebalances them – to reflect changes in stock prices, growth rates and more to give.

As a result, investors will get a smaller share of Apple, Amazon and Microsoft in their growth ETFs. They will also get a bigger share of the financial companies, as the rebalancing Berkshire Hathaway Inc., JPMorgan Chase & Co. and others delivers more growth while reversing value characteristics.

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The rebalancing is important to investors because it “changes the sector exposure of all ETFs linked to these indices, which affects their future performance,” wrote Ullal, a member of etf.com’s editorial advisory board.

Share of IT and Financial Sectors in the S&P 500 Growth ETF after Year-End Rebalancing (2020-24)

Source: CFRA

S&P rebalances the growth and value indexes based on a widening or narrowing of a stock’s growth-to-value ratio. While a company exit from growth suggests a slowing share valuation — Apple is up 9.4% in the past 30 days and IVW itself is up 3% — S&P looks at a range of factors, Ullal said.

“While mega-cap tech names like Apple and Microsoft retain growth company characteristics such as price momentum, they must also have scored relatively high on some value characteristics, such as sales-to-price ratio, compared to other growth companies in the S&P 500 universe such as Nvidia, Tesla or ServiceNow,” he wrote in an email.

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Now that their weighting in the S&P 500 Growth Index has been reduced, technology’s share of the S&P Value Index has more than doubled, from less than 10% last year to more than 20% last year, according to CFRA. The technology companies listed above have been assigned weights that are now roughly evenly split between growth (a company that is growing faster than the market average) and value, a stock whose price may not accurately reflect the company’s true value relative to the rest of the market.

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