SPYG ETF: The Dip Offers A Long-Term Buying Opportunity (NYSEARCA:SPYG)

Growth investors should expect a bumpy ride ahead as market volatility is expected to remain high in the second half of 2022 due to high inflation and monetary tightening policies. Nevertheless, this situation has created an attractive opportunity for investors to accumulate long-term positions in large-cap growth stocks. One of the best ways to capitalize on the dip and achieve high risk-adjusted returns is to add ETFs like SPDR Portfolio S&P 500 Growth ETF (NYSEARCA:SPYG) which tracks the performance of large-cap growth stocks. SPYG looks less risky when compared to small and mid-cap growth ETFs and offers better than broader market returns during a bull run.

Valuations Came Down To The Buying Zone

A great trading strategy to generate lofty returns is to buy the dip, and I believe the recent pullback has left growth stocks undervalued while headwinds that have wiped out trillions of dollars of market value in the past two quarters are likely to continue. The selloff has, however, eased growth stock valuations back to their 5- to 10-year averages, and it appears that the worst of the damage is over. According to Bloomberg data, tech stocks are now trading below 20 times earnings, compared to two decades’ highs of 43 times earnings that they had hit early in 2021. Small and mid-cap non-profitable tech stocks lost 50 to 70% of their value from the recent peak, while most large-cap growth stocks are down 15 to 25% from their recent highs. The widespread selloff has also slashed S&P 500’s PE ratio to around 17.6, down from a 5-year average of 18.6 times earnings.

Morningstar data also suggests stocks in the large-cap growth category now trade at a 17% discount and are attractively priced for long-term investors. Large-cap growth stocks like Meta Platforms (FB) are trading around 16 times forward earnings, while Alphabet’s ((GOOG)(GOOGL)) forward PE is down 27% from its five-year average. A similar trend occurred with other key tech stocks such as NVIDIA (NVDA), Apple (AAPL), and Amazon (AMZN) following the selloff. While the second half of the year is predicted to be turbulent due to rate hikes, inflation, and economic contraction, I am confident that most of these headwinds have already been priced into stocks. Despite that, it is prudent to reduce the risk associated with a single stock by buying growth ETFs like SPYG.

SPYG Offers Better Risk Reward Than Small and Mid-Cap Growth Focused ETFs

SPYG invests in large-cap growth stocks across all 11 sectors. The ETF has outperformed the market over the past three, five, and ten years, but has been underperforming over the last twelve months due to bearish trends for growth stocks. However, as the chart above shows, it still performed better than small and mid-cap focused ETFs. SPYG lost around 3% compared to a double-digit share price drop of Vanguard Mid-Cap Growth Index Fund ETF (VOT) and Vanguard Small-Cap Growth Index Fund Admiral Shares (VSGAX). The large spread in returns reflects investors’ fears that slowing economic conditions would adversely affect revenue growth and expansion plans of small to mid-sized companies that heavily rely on external borrowing.

On the other hand, SPYG looks less risky due to the fact that nine of its top 10 stock holdings, which account for over 50% of the entire portfolio, belong to the large-cap category of stocks from the tech and consumer cyclical sectors. This is because all of these companies have generated hefty profits over the years, which has enabled them to accumulate substantial amounts of cash on their balance sheets. Healthy balance sheets made them less vulnerable to high-interest rates. Furthermore, their strong cash position enables them to invest in growth opportunities to support revenue and earnings growth.

SPYG Looks Better Than Peers

So far this year, growth-oriented ETFs such as SPYG and its closest peers Invesco S&P 500 Growth ETF (RPG) and Vanguard S&P 500 Growth Index Fund ETF (VOOG) have lost a significant amount of value due to broader market conditions. However, factors such as low expense ratio and strong asset flows make SPYG a better long-term investment than its peers.

Based on the Seeking Alpha quant grades, SPYG gained a buy rating with a score of 3.55 out of 5. Its low expense ratio of 0.04% has an A-plus Quant grade as opposed to RPG’s B minus and VOOG’s A. A B+ grade for its asset flows is also better than that of its peers and indicates investors’ confidence in its future fundamentals. Furthermore, its low risk and solid momentum score make it an excellent ETF to buy and hold for the long term.

In Conclusion

SPYG is one of the low-cost ETFs that offer exposure to large-cap companies with strong sales, earnings, and growth characteristics. After a 21% share price selloff so far in 2022, it offers a perfect buying opportunity for long-term growth investors who are willing to endure short-term pain in order to achieve robust returns in the long run. With monetary tightening and slowing economic conditions, the fund’s portfolio composition makes it less risky than small- and mid-cap growth-focused ETFs.