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SPGP Vs. SPY: SPGP Will Outperform Over The Long Term


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Investment Thesis

Growth at a reasonable price (GARP) investing was popularized by legendary Fidelity manager Peter Lynch. When we think about GARP investing, there is a clear relationship between the growth rates of a company and its valuation. While the style may not have rigid boundaries for including or excluding stocks, a fundamental metric that serves as a solid benchmark is the price/earnings growth (PEG) ratio. The PEG shows the ratio between a company’s P/E ratio (valuation) and its expected earnings growth rate over the next several years. A GARP investor would seek out stocks that have a PEG of 1 or less. In other words, according to GARP, the Holy Grail of investing would be to buy a stock that is growing at the faster rate than its P/E ratio (valuation). In this article, I will be reviewing the Invesco S&P 500 GARP ETF (NYSEARCA:SPGP) which represents in my opinion a very interesting alternative to the S&P 500.

Strategy Details

The Invesco S&P 500 GARP ETF tracks the performance of the S&P 500 Growth at a Reasonable Price Index. The Index is composed of the 75 highest growth scores and quality and value scores securities in the S&P 500. The index defines the growth score as the average of the three-year earnings per share growth and the three-year sales per share growth rate. Once the growth score is calculated, the index will retain the top 150 stocks eligible for inclusion in the index. This list is then filtered based on the quality/value score that takes into consideration the fundamentals of the companies, such as the financial leverage ratio, the return on equity, and the earnings-to-price ratio.

If you want to learn more about the strategy, please click here.

Portfolio Composition

From the sector allocation chart below, we can see the index places a high weight on the Health Care sector (representing around 29.4% of the index) followed by Information Technology (accounting for 21.4% of the index) and Financials (representing around 17.3% of the fund). The largest three sectors have a combined allocation of approximately 68.1%. I think it is important to see how that fits your diversification goals and if you are comfortable with higher exposure to these three sectors. In terms of geographical allocation, SPGP invests in the US.

Source: Invesco

The fund is currently invested in 75 different stocks. The top ten holdings account for 17.75% of the portfolio, with no single stock weighting more than 3%. All in all, I would say that SPGP is very well diversified across the different issuers.

Source: Invesco

Since we are dealing with equities, one important characteristic is the valuation of the portfolio. According to Invesco, the fund currently trades at an average price-to-book ratio of 3.81 and at an average forward price-to-earnings ratio of 16.91. In addition to that, the portfolio has a return on equity of 52.5%, which is pretty impressive, to say the least. If we compare SPGP’s valuation to the SPDR S&P 500 Trust ETF (SPY), we can actually see that SPGP provides at the moment good value for money, trading at a lower price-to-book ratio and at a lower price-to-earnings ratio. On top of that, SPGP’s constituents are selected specifically for their high growth rate, and if we factor in a higher growth rate over the long term compared to SPY, I would argue that the difference in valuation is even higher.

Source: SSGA SPY Valuation

Is This ETF Right for Me?

SPGP has a distribution rate of 0.64%. Given the low dividend yield, this ETF is not suitable for the dividend investor. However, if you are looking for capital appreciation, SPGP offers you a way to potentially outperform the S&P 500. I have compared below the price performance of SPGP against the price performance of the SPDR S&P 500 Trust ETF over a 5-year period to assess which one was a better investment. Over the five-year period, SPGP clearly outperformed SPY. Compared to the S&P 500, SPGP rose by more than 74 percentage points. To put it into perspective, a $100 investment in SPGP five years ago would now be worth $287.85. This represents a CAGR of 23.55% which represents a very good absolute return.

Source: Refinitiv Eikon

If we take a step back and look at the performance from a 10-year perspective, it is worth noting that SPGP has constantly outperformed the S&P 500 over that period. Most of the time in my ETF research, the strategies have a very hard time outperforming the S&P 500 over a 10-year period. However, I’m quite impressed by SPGP’s past performance, and even if we cannot base our future expectations on past performance, I personally think there is a high chance that SPGP will continue to outperform the S&P 500 given the fact that it has a lower valuation and invests in companies with good growth prospects.

Source: Refinitiv Eikon

Key Takeaways

To sum up, SPGP offers investors a good alternative to the S&P 500 and to other growth strategies in my opinion. Over the past 10 years, SPGP has crushed the S&P 500 by constantly investing in companies with high growth at an attractive valuation. Moreover, SPGP is cheaper now from a valuation perspective than SPY and I think this will lead to better returns going forward. From a portfolio perspective, the fund is very well diversified with no single issuer accounting for more than 3%, and it is well diversified across the different sectors of the economy. All in all, I’m bullish on SPGP and I think that the strategy will continue to outperform the S&P 500 over the long term.



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