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A Better Way to Bet on Growth Stocks

Stocks in this article: XOM MSFT IBM JNJ KO

The blend stocks can hold back a growth fund when the sector is rallying. To avoid the drag, pure funds eliminate blend stocks entirely. So all the holdings in pure growth funds have clear growth characteristics. As a result, the pure growth portfolios tend to have higher prices. The price-earnings ratio for the pure iShares Morningstar Large Growth is 17.6, compared to a figure of 15.8 for the conventional SPDR S&P 500 Growth. Besides being more expensive, the pure growth funds tend to have higher earnings growth and more volatility. Pure value funds have lower P/Es than conventional competitors.

Some pure funds are also different because of how they weight holdings. Conventional funds weight stocks in their portfolios according to market capitalization. So stocks with bigger market values have heavier weightings. As result the top holdings in SPDR S&P 500 Growth include such giants as International Business Machines (IBM), Johnson & Johnson (JNJ) and Coca-Cola (KO). Instead of weighting by market cap, the Guggenheim pure growth funds give the greatest weight to stocks with the strongest growth characteristics. So the top holdings include companies with rapid earnings growth, such as biotech star Alexion Pharmaceuticals (ALXN) and online travel site (PCLN). Such stocks can surge in growth rallies, but they can also sink hard. When stocks dropped in the third quarter of 2011, Guggenheim Pure S&P 500 Growth fell 16.8%, compared to a decline of 11.0% for SPDR S&P 500 Growth.

Because they emphasize stocks with the most extreme growth or value characteristics, the pure funds often give heavy weightings to certain sectors. With financials remaining depressed, Guggenheim S&P 500 Pure Value (RPV) has 37.1% of assets in the sector, while SPDR S&P 500 Value (SPYV) only has 24.1% in financials. For the pure funds, the big sector weightings can boost returns during the times when value stocks soar.

Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.
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