What is Style Investing?
Style investing is an investment approach in which stocks are categorized according to different style attributes, typically growth and value. Many style-based approaches further segment stocks according to market capitalization (large-, mid-, or small-cap). Style investing is based on the belief that certain identifiable categories of stocks do well over time but do not necessarily do well at the same time. For example, growth stocks beat value stocks during some periods, with the converse also being true. Whether rooted in fundamental market views or on technical analysis, tactical allocation among the various styles and sizes is emphasized as the key to achieving successful performance. It can be an effective way for investors to express their long- and short-term market views.
What is the Traditional Style Approach?
Traditionally, most style indices are constructed using all the stocks in the corresponding parent index universe, identifying them as either growth or value using multiple factors and weighting them by market cap into the respective index. However, this method results in a group of stocks that has no definitive style characteristic. These stocks are regularly included in both style indices, resulting in “style overlap” between the growth and value indices, which may keep the stocks from fully participating in style performance.
For example, the S&P 500® Growth Index and S&P 500® Value Index are traditional style indices often used as a benchmark by many actively managed mutual funds and passive ETFs. These indices are comprised of the holdings in the S&P 500®. A third (1/3) of the stocks are identified as growth and a third (1/3) are identified as value and are included in their respective style index. The remaining 34% of the stocks are ambiguous in style and are shared by both the S&P 500 Growth and the S&P 500 Value indices.
Below is an example of how these blend stocks overlap between the two indices.
Source: Bloomberg, data as of 3.31.2016. Subject to change on a daily basis. The securities mentioned are provided for illustrative purposes only and should not be deemed as a recommendation to buy or sell.
How Is Pure Style Different?
For the purists who want more narrowly defined style indices that could deliver truer style performance, S&P introduced a series of Pure Style indices. Employing a more robust definition of style and with improved discriminatory power to differentiate between growth and value, the Pure Style indices include only stocks with pure growth and pure value characteristics. There are no overlapping stocks and, since stocks are weighted in proportion to their relative style attractiveness, the Pure Style indices avoid the size bias caused by market cap weighting.
The S&P 500® Pure Value Index and the S&P 500® Pure Growth Index are the Pure Style indices comprised of the holdings in the S&P 500® Index. They are structured by identifying a third (1/3) of the market capitalization of the parent index as pure growth, and a third (1/3) as pure value. The remaining 34% of stocks–those that are neither purely growth nor purely value–are excluded from the indices and there are no overlapping holdings.
For those investors who want to take a position in the value and/or growth segments of the equity market, the pure style approach may be effective in isolating specific style factors. It may provide greater style purity per dollar invested and potentially deliver outperformance over the watered-down traditional style benchmarks.
What is Guggenheim S&P Pure Style ETFs Index Methodology?
While some traditional style methodologies do not exclude undefined or blend stocks, Guggenheim Pure Style ETFs include only stocks with the strongest style attributes, which weights by style score rather than by market cap. This approach provides exact exposure to value and growth—eliminating undefined or blend stocks from portfolios.
Below is an example of how the benchmark indices for the Guggenheim S&P 500® Pure Style Growth and S&P 500® Pure Style Value indices are constructed. The same process is followed for the S&P 400® and S&P 600® Pure Style indices.
Book Value to Price ratio is the book value per share of a stock divided by its market price. Earnings to Price ratio is the annual earnings per share of a stock divided by its market price. Sales to Price ratio is the trailing 12-month's sales per share of a stock divided by its market price. Three-Year Change in Earnings per Share over Price per Share is the change in earnings per share for the last three years of a stock divided by its market price. Three-Year Sales per Share Growth Rate is the growth of sales per share of a stock over the last three years.