Beating the S&P 500 Challenge: An Insight Into High-Performing ETFs
In the competitive arena of investment, achieving returns that surpass the S&P 500 index is a noteworthy feat. Many investors aim to achieve this by gravitating towards exchange-traded funds (ETFs) like the Vanguard 500 Index ETF or the SPDR S&P 500 ETF, which offer immediate diversification across 500 of the largest U.S. firms. Indeed, the S&P 500 is renowned for its robust selection process, which involves continuously updating its portfolio by eliminating underperforming stocks and incorporating promising growth stocks.
A striking illustration of this dynamic approach is the S&P 500’s recent decision to replace Whirlpool with Super Micro Computer, a burgeoning name in the AI server industry. This move underscores the index's emphasis on including only profitable, large-cap U.S. stocks, which significantly contributes to its strong performance over time.
Despite the challenges, certain funds have managed to outshine the broad-market index. A case in point is the Invesco S&P 500 GARP ETF (NYSEMKT: SPGP), which focuses on growth at a reasonable price (GARP) stocks. This ETF stands out for beating the S&P 500 in seven out of the last ten years, thanks to its unique strategy of selecting stocks that exhibit both growth and value characteristics.
The Invesco S&P 500 GARP ETF closely follows the S&P 500 Growth at a Reasonable Price Index, comprising approximately 75 stocks identified for their outstanding growth scores—based on earnings and sales-per-share growth over the past three years—as well as their quality and value composite score, factoring in financial leverage, return on equity, and price-to-earnings ratio.
Leading the pack in the fund's portfolio are names like Diamondback Energy, Steel Dynamics, Marathon Petroleum, CF Industries, and Nucor, with the energy sector alone accounting for a substantial 26.1% of the fund, followed by information technology at 22%.
The GARP ETF's success stems from its rigorous standards that efficiently filter out overvalued stocks and those with insufficient growth, positioning it as a formidable contender against the broader index. Unless there is an unforeseen downturn in oil prices, potentially impacting the extensive energy stocks within the ETF, the fund is primed for continued outperformance. Moreover, the GARP ETF is likely to maintain its edge as the broader stock market evolves, bolstered by the initial successes of the so-called Magnificent Seven stocks. Additionally, its judicious valuation offers a safeguard against any potential market downturns, further cementing its status as a solid investment choice to surpass the S&P 500.
Analyst comment
Positive news: Beating the S&P 500 Challenge: An Insight Into High-Performing ETFs
As an analyst, it is expected that the market will continue to favor ETFs like the Invesco S&P 500 GARP ETF which has consistently outperformed the S&P 500. The fund’s unique strategy of selecting growth and value stocks, coupled with its rigorous standards, positions it well for continued outperformance and makes it a solid investment choice to surpass the S&P 500.
