ETFs such as the $58.5 billion iShares S&P 500 Growth ETF (IVW) are getting fresh makeovers now that high-flying tech stocks including Apple Inc. and Amazon.com Inc. are no longer considered pure growth by the indexes the funds track, according to CFRA Research.
Microsoft Corp. and Adobe. Inc. are also among companies no longer categorized as pure growth under S&P Global’s latest rebalancing of its growth and value indexes, CFRA’s Aniket Ullal wrote. Those companies, along with Advanced Micro Devices Inc., now fall in both camps.
Dozens if not hundreds of exchange-traded fund and mutual fund issuers follow S&P indexes when selecting stocks for their funds, and the firm changes the indexes’ weightings—or rebalances—often to reflect changes in stock prices, growth rates and more.
As a result, investors will get a smaller slug of Apple, Amazon and Microsoft in their growth ETFs. They’ll also get larger portions of financial firms since the rebalancing gives Berkshire Hathaway Inc., JPMorgan Chase & Co. and others more of a growth blush while dialing back value characteristics.
The rebalancing is important to investors because it “changes the sector exposure of any ETFs linked to these indices, which impacts their future performance,” wrote Ullal, a member of etf.com’s editorial advisory board.
Share of IT and Financial Sectors in S&P 500 Growth ETF After Year-End Rebalances (2020-24)
Source: CFRA
S&P rebalances the growth and value indexes based upon a widening or narrowing of a stock’s growth-to-value ratio. While a company moving out of growth suggests a slowing stock appreciation—Apple has surged 9.4% over the past 30 days and IVW itself jumped 3%—S&P looks at a range of factors, Ullal said.
“Although megacap tech names like Apple and Microsoft retain characteristics of growth companies like price momentum, they must have also scored relatively high on some value characteristics such as sales to price ratios compared to other growth firms in the S&P 500 universe like Nvidia, Tesla or ServiceNow,” he wrote in an email.
With their weighting in the S&P 500 Growth Index trimmed, tech’s share of the S&P Value Index has more than doubled, to above 20%, from less than 10% last year, according to CFRA. The tech companies mentioned above have been assigned weightings that are now about evenly divided between growth—a company growing faster than the market average—and value, a stock whose price may not accurately capture the company’s true value relative to the rest of the market.
