The U.S. economy is showing an impressive recovery with solid retail sales data, positive housing data, an improving labor market and increasing consumer spending. As a result, the S&P 500 index has shown a huge rally since the beginning of 2013, and is now hovering near its all-time highs.
In such a scenario, large caps have been strong performers so far this year, and the gains are widely expected to continue as we approach the summer months. These securities seem to be more reasonably valued at this time and offer higher price appreciation, compared to small and mid cap securities in particular (read: Is This a Better Large Cap ETF?).
Furthermore, investors should focus on growth stocks in this capitalization level to earn more returns. Growth investing is basically a momentum play, which makes it a great strategy in a trending market (i.e. a market characterized by a prolonged uptrend). This is because stocks in the growth ETF portfolio harness their momentum in earnings to create a positive bias in the market, resulting in rocketing share prices.
As such, pure growth funds tend to outperform during such an upward trend. However, these funds offer exposure to a wide variety of stocks with growth characteristics, such as high P/B, high P/S and high P/E ratios, which increase company-specific risks. Additionally, these exhibit a higher degree of volatility especially compared to value stocks (read: The Best Investing Style ETF This Fiscal?).
Given the pros and cons, a look at the top ranked ETFs in the space, with a lower level of risk, could be a good idea for investors especially if the upswing in the market persists ahead in the year. One way to find a top ranked ETF in the large cap growth space is by using the Zacks ETF Ranking system (read: Zacks ETF Rank Guide).
About the Zacks ETF Rank
The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, style box, or asset class. Our proprietary methodology also takes into account the risk preferences of investors. ETFs are ranked on a scale of 1 (Strong Buy) to 5 (Strong Sell) while they also receive one of three risk ratings, namely Low, Medium, or High.
The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of five ranks within each risk bucket. Thus, the Zacks Rank reflects the expected return of an ETF relative to other products with a similar level of risk (see more in the Zacks ETF Center).
For investors seeking to apply this methodology to their portfolio in the large cap growth sector, we have taken a closer look at the top ranked RPG, having a Zacks ETF Rank of 2 or Buy with a ‘medium risk’ tolerance level. The details are highlighted below:
Guggenheim S&P 500 Pure Growth ETF (RPG)
For those focused on outsized growth rates, RPG could be an intriguing choice. Launched in March 2003, the fund seeks to match the price and yield of the S&P 500 Pure Growth Index, before fees and expenses.
With a total of 109 stocks in its basket, the product is widely spread across individual securities. The top three firms – SLM Corp. (SLM), Tesoro Corp. (TSO) and Netflix (NFLX) – comprise only 7.15% of the combined assets in the basket.
From a sector perspective, consumer discretionary has been the top priority of the fund representing about 29.26% of the total assets, followed by healthcare and information technology with 17.51% and 16.11% share, respectively (read: Make the Ultimate Consumer Bet with the Gaming ETF).
The product so far has managed assets of $461.5 million and is less volatile as indicated by the annualized standard deviation of 17.57%. However, the fund trades in a small volume of roughly 46,000 shares per day, suggesting that bid ask spreads are relatively wide and that total costs may come in higher than the 35 bps expense ratio.
The P/E and B/V ratio is quite high for the fund at just over 40 and 4.0, respectively, suggesting an incredible focus on growth. This approach has largely paid off in terms of performance, as RPG has gained about 23% so far in 2013 and nearly 29% over the trailing one-year period.
Both of these metrics are favorable when compared to others in the space and the broad market, suggesting that RPG has been an excellent choice for many investors. The ETF has crushed many large cap funds, beating SPY and similar funds like VUG or IWF by a pretty good margin in the trailing one-year time frame, with big gains in longer time periods as well.
RPG is probably an ETF which has been overlooked by investors in the large cap space, although it has proven itself to be an outperformer. The fund is a bit costly when compared to other choices in the space, while volume isn’t great, though neither of them should be a big problem considering its performance history of late (read: Time to Consider Pure Growth and Value ETFs?).
So, investors looking for the large cap growth ETF should consider RPG for their exposure, as it is a top rated ETF that has beaten out similar products in 2013 and could be poised to lead the way higher as well.
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