Most investors fall into one of two groups: growth investors or value investors. The last few years have been great for growth, which has been led by Big Tech. Value strategies have been behind the S&P 500 for years because it has a lot of growth stocks, but buyers may still be interested in them.
So why think about value now? There are a lot of big companies in the S&P 500 SPX -1.73% right now. Apple Inc. AAPL -0.70%, Microsoft Corp. MSFT -1.64%, and Nvidia Corp. NVDA -4.09% make up 19% of the $554 billion SPDR S&P 500 ETF Trust SPY -1.68%.
Hey.
Based on market value, the S&P 500 is weighted. This encourages success and can make you a lot of money during a long bull market. This week, Nvidia’s price dropped 11% over two trading days, which brought attention to the risk of concentration.
A new study by MFS Investment Management that looked at how prices have changed in the U.S. stock market over the past 100 years shows that we are now almost 18 years into a time of rising concentration. A cap-weighted stock portfolio would not have done as well as other strategies after the last four concentration peaks. A growth portfolio would not have done as well as a value portfolio.
Another reason you might want to add some value stocks to your portfolio is that these companies might gain from lower borrowing costs as interest rates go down.
What does a value stock do?
S&P Dow Jones Indices, which is part of S&P Global, takes care of the S&P 500 Index. There are value and growth sections of the index. By adding up the numbers for price-to-earnings, price-to-book-value, and price-to-sales ratios, the S&P 500 Value Index SP500PV -1.49% is able to narrow the S&P 500 down to about two-thirds of the companies.
The S&P 500 Growth Index VSPGX -2.26% is made up of 230 stocks that were chosen based on price growth over the past year and increases in sales and earnings over the past three years. The indexes are re-established every December.
Market value is used to decide how much weight to give to each of the S&P 500 Value and S&P 500 Growth indexes.
There are a lot of companies in both the S&P 500 Value and Growth indexes because there are so many stocks in each.
This is S&P’s guide to its value index technique. It explains how its three approaches to choosing value stocks work and how the S&P 500 Value index has the least “relative value factor exposure.” There are several exchange-traded funds that follow this index. These are the iShares S&P 500 Value ETF IVE -0.88%, the SPDR Portfolio S&P 500 Value ETF SPYV -0.93%, and the Vanguard S&P 500 Value ETF VOOV -1.07%.
Hey.Here are S&P’s two more specific ways of tracking value stocks in the S&P 500:
- The S&P 500 Pure Value Index SP500PV -1.49% is made up of 95 stocks whose weights are based on the value scores given by the index provider. Every year in December, this index is rebuilt and rebalanced, which changes the number of stocks that are in it. This keeps cap-weighting from happening, and there is no overlap because these stocks aren’t also in S&P’s growth index. S&P says that this index is rather exposed to its value drivers. These funds follow the Invesco S&P 500 Pure Value ETF RPV -1.40%.
It is said by S&P that the S&P 500 Enhanced Value Index has the most value factor exposure. The index is made up of 100 stocks, with their weights changed so that the S&P value score for each company is multiplied by its market valuation. This measure is put back together and balanced twice a year, in June and December. The Invesco S&P 500 Enhanced Value ETF (SPVU -1.38%) follows it.
