How To Properly Utilize Growth and Value ETFs

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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.

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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.

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