How To Properly Utilize Growth and Value ETFs

One of the tremendous benefits of using exchange-traded funds (ETFs) is the ability to customize your exposure to target a specific theme.  This flexibility allows for greater control of your sector and position sizing relative to a broad-market benchmark such as the S&P 500 Index.

Investors who are looking to build a solid foundation should start out with a traditional core holding such as the iShares S&P 500 ETF (IVV) or the Vanguard Total Stock Market ETF (VTI).  Both of these funds provide market-cap weighted exposure to every sector of the economy.  Ultimately, that means transparent correlation to the U.S. stock market at an extremely low cost. You own the whole shebang.

background, modern, room,

ImageFlow/Shutterstock.com

For those that want to get a little more sophisticated, there can be significant opportunities to overweight your holdings towards a specific subset of stocks using a growth or value-focused index.  This may be appropriate for a portion of your stock allocation as a tactical addition or a fundamental enhancement.

Below is a list of reasons why this may make sense:

– You have significant exposure to a single sector or stock in your company retirement plan and want to diversify away from this area.

– One group (growth or value) has meaningfully outperforming the benchmark and you wish to take advantage of this recent momentum.

– You subscribe to a fundamental belief in growth or value characteristics.

– You are trying to take advantage of a mean-reversion opportunity after a prolonged period of underperformance by one group or the other.

– You want to fine tune your sector exposure to varying degrees than the conventional sector weights of a market-cap weighted index.

Whatever the case may be, there are a number of tools and indexes to achieve your goals.  For example, the iShares S&P 500 Growth ETF (IVW) and iShares S&P 500 Value ETF (IVE) are two ways of splitting this large-cap index apart.  The interesting thing about IVW and IVE is that they aren’t pure growth or value.  They also hold stocks with a blended or undefined classification as well.

Continued on the next page.