What measure to use to determine what’s a value stock and what’s a growth stock is an ongoing debate, and especially relevant now, when Microsoft—typically not considered a value stock—is the largest holding in the S&P 500 Value Index, according to an article in The Wall Street Journal. Amazon and Netflix are also in the index’s top 10. An ETF that tracks the index, the $25 billion iShares S&P 500 Value ETF (IVE), has risen 12% in 2023, compared to under 5% for some of its competition that uses the Russell 100 and CRSP value indexes.
However, “I would question S&P’s or any definition that could ever lead to a company with a double-digit price-to-sales [ratio] entering a value index,” says Rob Arnott of Research Affiliates, according to The Journal. Investors should dig into why Microsoft is included in the index before buying into index-following funds such as IVE. Doing so actually requires looking at the growth category; S&P aims to seize growing companies that usually have price-to-fundamentals ratios that are pricier. But in 2009, spurred by the outperformance of growth-focuses fund managers, S&P reconfigured its growth indexes to factor in momentum along with sales growth and price-to-earnings ratio. The reason Microsoft is in S&P’s value index is because its 2022 tumble caused it to fall out of the growth index. The company is actually split in half; in the growth index, it’s the second-biggest stock, while its the top stock in the value index, the article explains.
Meanwhile, S&P’s pure growth index doesn’t even include the tech giants that many associate with growth because of the massive tech rout last year. But part of the reason why they fell so much last year was because they were designated as pure growth stocks, since higher interest rates impact growth more negatively. Indeed, investors wanting to cash in on this year’s tech rally shouldn’t buy into the S&P 500 Pure Growth index, where energy stocks currently account for a quarter of the holdings.
Because of complicated nature of the S&P’s gauges, it’s vital that investors know what they’re actually buying, which could take some due diligence, especially with ETFs. Most would assume that something with the word “value” in its name would be a value index, and yet that index currently holds stocks better known for their growth. It’s also important to look beyond past performance. Value-minded investors, such as Arnott, might favor a value ETF, and while the ones tied to the S&P may look good right now, the reason why is because they’re actually full of growth stocks. Although value hasn’t outperformed this year as it did in 2022, those who want to buy value because they think it will come back should look for a more well-reasoned gauge and not just one that lucked out of value’s downturn by mixing in growth, the article advises.
