Here’s a fund that employs a ‘smart beta’ style to increase performance.
Invesco Russell MidCap Pure Growth ETF (PXMG)
From Moneyletter
INVESCO Russell MidCap Pure Growth ETF (PXMG) has dominated the top of our domestic stock funds list. Many actively managed mutual funds have a stated objective of investing in growth stocks. But managers often have the latitude to invest in cyclical or value stocks they expect to appreciate. The idea behind the INVESCO Pure Style indexes is to “achieve style accuracy,” that removes any style overlap.
Many style methodologies take a parent index, identify component stocks as value or growth, assign them to the relevant sub-indexes, and weight the components by market capitalization. Market cap weighting inherently creates a bias to the larger stocks, and may thus favor overvalued stocks.
Citing research from FactSet Research Systems, INVESCO notes that stocks that lack distinctive value or growth characteristics, so-called “style ambiguous” stocks, are often shared by both value and growth sub-indexes. For example, in the S&P 500, about one-third of components were classified as style ambiguous. Hence (as of March 2018), the S&P 500 Value Index and S&P Growth Index had 177 total holdings in common.
Enter the S&P Pure Style methodology, a smart beta approach that screens stocks by fundamental factors. Value factors include price, and sales and earnings multiples, while growth factors include price, and sales and earnings momentum. Stocks are then assigned a style score and weighted by score. Stocks with weak or no style scores are excluded. The process of weighting a stock by its score eliminates the link between stock price and portfolio weight. The targeted focus on growth and value offers the potential for outperformance in markets where a particular style is in favor. The converse, of course, is true as well.
INVESCO Russell MidCap Pure Growth holds 94 stocks with about 25% of assets in its top ten holdings. Within the top ten, the best performers are technology firms Universal Display and Ubiquiti Networks (up 82.1% and 72.4%, respectively). Universal Display specializes in organic light-emitting diode—or OLED—technologies for use in displays for mobile phones, tablets, televisions, etc. Ubiquiti Networks is a wireless and wireline network equipment provider for small internet service providers and others both in the US and internationally.
Other top ten holdings with Fund returns of 37.2% and 6.1% in 2017 and 2018, respectively, outpaced more than 95% of Morningstar’s Mid Cap Growth category. In 2019 through May 3, its 31.2% gain bests 93% of its peers.
Brian W. Kelly, Moneyletter, www.moneyletter.com, 800-890-9670, May 2019