Large-Cap Growth ETFs: A Sampler

Wall Street has traditionally focused a lot of analytical energy on the large-cap universe, because these companies make up such a big percentage of the stock market's value. Unfortunately, all this attention makes it hard for active managers to get an informational advantage over indexed assets and beat their returns. Low-cost ETFs are a very good fit for investors looking for exposure to this part of the market, since they provide market performance while avoiding the high expenses associated with active management.

Growth vs. value
Large-cap stocks can be broken down into growth and value styles. Picking the better style is not an easy choice, since growth and value investors have jousted back and forth in a perpetual debate over which beats which. Growth investors typically seek out stocks with the potential to grow, as indicated by earnings that expand at a rate faster than average. Stocks in technology, health care, and consumer discretionary sectors are typically a growth investor's sandbox.

Value investors, on the other hand, search for stocks that are believed to be underappreciated by the market -- specifically, stocks whose prices do not reflect the long-term fundamentals of the company. These stocks tend to be focused in areas like utilities, energy, and basic materials.

Numerous studies have shown that value investing beats growth investing. A large number of studies have also come to the opposite conclusion. Depending on the timing, both may be right. For the past six years or so, value investing has been the performance leader. Such a long run might be an indication that growth will soon take a place at the winner's circle.

Large-cap options
If you decide growth investing is the style you want, that's the first step. Large-cap growth ETFs come in an array of flavors and from a number of ETF sponsors. Not all these funds are created equal, and there can be significant differences between their performance and expenses. A taste for the range of these ETFs is provided by a look at a sampler of new and established funds from BGI, Vanguard, SSGA, Rydex, and PowerShares.

Health care is a common thread for all five of these funds, showing up as a top sector in three. IT is the largest sector for two funds in this group.

Although all five funds are large caps, the market capitalization of their holdings ranges from an average of $16 billion to $57 billion. Titanic companies can be harder to move in one direction or the other, so you may prefer a fund with a smaller or larger market cap at certain points in the economic cycle. Three of these funds have a beta that is only slightly above the market, with the funds from PowerShares and Vanguard the highest of the bunch.

IVW
The iShares S&P 500 Growth Index Fund (AMEX: IVW  ) from BGI uses a representative sampling strategy to track the S&P 500/Citigroup Growth Index. The fund holds more than 300 securities, and since its inception in May of 2000, it has grown to more than $4.5 billion in assets.

IVW's largest sector exposure is in IT at 20%, followed by health care at 17% and energy at 14%. The fund has an average market cap of $57 billion, and a surprisingly large 7% of assets are invested in ExxonMobil (NYSE: XOM  ) , more than twice as much as any other stock.

VUG
Vanguard Growth (AMEX: VUG  ) tracks the MSCI US Prime Market 750 Index, which is made up of large-cap growth companies. VUG came to market in early 2004 and now has $13.7 billion in assets spread out over 424 holdings with an average market cap of $36 billion. The fund has a beta of around 1.16, the second highest of this group. Similarly to IVW, VUG has its largest sector exposure in IT at 27%, followed by consumer discretionary and health care at 17% and 16%, respectively.

ELG
The SPDR DJ Wilshire Large-Cap Growth ETF (AMEX: ELG  ) tracks the Dow Jones Wilshire Large Cap-Growth Index. Components of the index are selected based on six factors: projected P/E ratio, projected earnings growth, price-to-book ratio, dividend yield, trailing revenue growth, and trailing earnings growth.

ELG has assets of nearly $250 million. Health care is the largest sector for this fund, at 18%, followed by consumer and financial services at 14% and 11%, respectively. ELG has an average market cap of $31 billion, and Microsoft is the fund's largest holding at nearly 3.5%.

RPG
The Rydex S&P 500 Pure Growth Fund (AMEX: RPG  ) has been around for a little more than a year and has gathered $44 million in assets. RPG has an average market cap of $16 billion, and Hospira (NYSE: HSP  ) , a specialty pharmaceutical and medication-delivery company, is the fund's largest holding at 1.5% of assets. As with other funds in this group, health care makes up the largest sector of RPG's assets at 25%.

PWB
PowerShares Dynamic Large-Cap Growth Portfolio (AMEX: PWB  ) tracks the Dynamic Large-Cap Growth Intellidex, which consists of 50 U.S. large-cap growth stocks selected principally on the basis of their capital appreciation potential.

PWB has $280 million in assets and an average market cap of $42 billion, along with the largest beta amongst this group of funds at roughly 1.30. Health care is the largest sector at 23%.

Expenses
Fees for this selected group of ETFs range from 11 to 64 basis points. Vanguard has a tradition of keeping expenses low, so it should come as no surprise that VUG's fee of 0.11 is the cheapest of the lot. At the other extreme is PWB with a fee of 0.64.

Performance
Low fees are an important part of a long-term investment strategy, but performance must be up to snuff as well. VUG and IVW have the best performance over the past two years, alternating the lead over that time frame. RPG and PWB are new funds and have yet to prove themselves.

2004

2005

2006

Expense Ratio

IVW

5.9

3.8

10.8

0.18

VUG

N/A

5.2

9.1

0.11

ELG

4.9

3.0

8.9

0.21

RPG

 N/A N/A  N/A  0.35 
PWB  N/A N/A  5.5  0.64 

Investors shouldn't try to time the market and shift between value and growth, since that is most likely a loser's game. Instead, find a good fund in value and one in growth, and hold these for the long run. There are a number of large-cap growth ETFs to choose from, and as usual, a good place to start looking is a fund that has good performance and low fees.

Love funds? You can see lead analyst Shannon Zimmerman's top picks with a 30-day free trial of Motley Fool Champion Funds.

Fool contributor Zoe Van Schyndel lives in Miami and enjoys the sunshine and variety of the Magic City. She does not own any of the funds or securities mentioned in this article. The Motley Fool has a disclosure policy.


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