Large-cap growth. It’s the only thing that’s really worked exceptionally well the last 2 years (and you can argue really since 2011 for the most part). All the momentum has remained there, and despite my concerns about the cycle being extended and tired, it keeps working. If you believe (unlike me) that large-cap growth will continue to outperform, then the Invesco Large Cap Growth ETF (NYSEARCA:PWB) is worth a look.
This exchange-traded fund seeks to track the Dynamic Large Cap Growth Intellidex Index, which screens for stocks based on 10 factors to identify companies that fit the style perfectly. The screen accounts for a number of different factors. These include the five-year projected earnings growth, one-year historical earnings growth, three-year sales growth, three-year cash flow growth, three-year book value growth, price-to-earnings ratio, price-to-book ratio, price-to-sales ratio, price-to-cash flow ratio, and dividend yield.
The issue aside from the question of where we are in the cycle is whether PWB is different from any number of large-cap growth funds out there. Let’s take a look.
A Look At The Holdings
One thing that I’m surprised by is that this fund only has 51 holdings. That alone makes it different from other large-cap growth funds, which are largely passive in nature. No position makes up more than 3.84% of the portfolio, which I also find important, given many large-cap growth funds have high concentration in the top 10.
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These are all the familiar companies you know, and which have carried the entire stock market over the last two years. These top holdings all have (i) above-average potential for growth in revenues and/or earnings relative to their peer group, (ii) innovative products, and (iii) a disruptive business model.
Sector Composition and Weightings
The sector composition is actually also pretty encouraging in my view. Because this is still large-cap growth, Tech makes up the biggest allocation. But at 38%, it’s actually got less exposure here than other large-cap growth funds. And while I am nervous about the tech sector’s momentum turning here, the lower weighting within the style category does make this relatively more appealing.
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Other sector weightings are par for the course here. I’d personally like to see more of an allocation to Health Care, but understand what drives the sector allocation is the index screening and stocks that are the result of it. Overall, it’s a growth portfolio with a more diversified weighting approach than other funds.
Peer Comparison
One fund worth comparing PWB to is the Schwab U.S. Large-Cap Growth ETF (SCHG) which also tracks large-cap growth stocks but from a passive perspective. SCHG has more holdings at 251, and has a larger allocation to Tech at 47%. When we look at the price ratio of PWB to SCHG, we find that PWB has, no surprise, underperformed. Why? The tech weighting has mattered more than the stocks individually themselves.
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I do think PWB has a chance to outperform over time as tech pulls back eventually. But for now, that’s just not the case.
Pros and Cons
On the positive side, the quant approach for stock-picking, which targets companies with growth-oriented characteristics, might lead to better returns and generate alpha. Through its quarterly rebalancing and reconstitution, the fund endeavors to keep track of evolving market conditions and growth prospects as they change over time. I like the lower tech exposure, and the very differentiated portfolio, while still staying true to the growth style it’s focused on.
The downside? It just hasn’t outperformed other growth proxies, which are passive and have a larger tech exposure. Fundamentals haven’t mattered as much as sector weighting when it comes to portfolio construction. And while the methodology of the index the fund tracks does look appealing, it just may be destined to be suboptimal, despite it sounding like that shouldn’t be the case.
Conclusion: Weighing the Growth Potential
I’m torn on Invesco Large Cap Growth ETF. I do fundamentally like the portfolio composition: Lower stock weighting in the top 10, a more balanced sector allocation, and fewer names all differentiate the fund. But PWB just hasn’t delivered. That’s not to say it can’t in the future because, as we know, past performance is not indicative of future results. I think it’s worth considering an allocation to blended against other growth funds, with the caution that it might continue to lag as long as tech continues to lead.
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