Latest Trade Alerts

A Better Way to Bet on Growth Stocks

Written by: Stan Luxenberg 07/02/12 - 9:21 AM EDT
Tickers in this article: IBM XOM MSFT JNJ KO

Pure funds can deliver extra juice because of their unusual construction. To build growth and value portfolios, conventional funds divide the universe roughly in half. Stocks with faster earnings or higher prices go in the growth basket, while lower-priced shares go into value. But some stocks have a mix of growth and value traits. These blend stocks can be placed in both growth and value funds. The blend group includes such familiar names as Exxon Mobil (XOM) and Microsoft (MSFT) , which are in both SPDR S&P 500 Growth and SPDR S&P 500 Value (SPYV) .

The blend stocks can hold back a growth fund when the sector is rallying. To avoid the drag, pure funds eliminate blend stocks entirely. So all the holdings in pure growth funds have clear growth characteristics. As a result, the pure growth portfolios tend to have higher prices. The price-earnings ratio for the pure iShares Morningstar Large Growth is 17.6, compared to a figure of 15.8 for the conventional SPDR S&P 500 Growth. Besides being more expensive, the pure growth funds tend to have higher earnings growth and more volatility. Pure value funds have lower P/Es than conventional competitors.


More Headlines

Some pure funds are also different because of how they weight holdings. Conventional funds weight stocks in their portfolios according to market capitalization. So stocks with bigger market values have heavier weightings. As result the top holdings in SPDR S&P 500 Growth include such giants as International Business Machines (IBM) , Johnson & Johnson(JNJ) and Coca-Cola (KO) . Instead of weighting by market cap, the Guggenheim pure growth funds give the greatest weight to stocks with the strongest growth characteristics. So the top holdings include companies with rapid earnings growth, such as biotech star Alexion Pharmaceuticals (ALXN) and online travel site Priceline.com (PCLN) . Such stocks can surge in growth rallies, but they can also sink hard. When stocks dropped in the third quarter of 2011, Guggenheim Pure S&P 500 Growth fell 16.8%, compared to a decline of 11.0% for SPDR S&P 500 Growth.