Changes Coming For Guggenheim Large-Cap ETFs
Summary This is the first in a series of (free-standing) articles analyzing the 121 large-cap ETFs that are currently available. Guggenheim currently has five large-cap ETFs, although one will be closed in January and another will be changing its index provider. I rank the five ETFs and come to some interesting conclusions about which of Guggenheim’s funds seems to be the best. In one of my recent articles, 1 I mentioned that a serious all-ETF portfolio needed to have at least one fund focused on U.S. large-caps. Which one? As of this writing, there are 121 ETFs that direct their attention to large-cap holdings, many focusing on the S&P 500 , the Russell 1000 or any of the variants of those two basic indices. 2 Is there a fund that could be said to be, in some meaningful sense, better than the others? Or, at least, is there some identifiable group of funds that seems to be – again, in some sense – better, from amongst which one could choose with a bit of confidence? I propose to do a long-term project involving the comparison of large-cap ETFs. My goal will be to identify funds that have promise, while at the same time identifying funds that might not be as tempting as others. Each article will be restricted to a handful of funds that have something in common (issuer, index, methodology, weighting, etc.); over the course of the project, no doubt some funds will show up more than once. In the end, it is not my expectation that there be one special fund that I hold up as the ” winner ,” but that readers will have some cogent discussions that may help separate the wheat from the chaff. Hopefully, there will be some surprises along the way just to keep things interesting. Along the way, I hope to develop some tools that will help in examining the group of large caps, and possibly help shed some light on other classes of funds, as well. 3 The articles are intended, and expected, to be independent from one another, so readers need not feel that they have to commit to the whole series. 4 The Guggenheim Large-Cap Funds Guggenheim Funds Distributors, LLC currently offers five ETFs that focus on U.S. large caps: Guggenheim Russell 1000 Equal Weight ETF (NYSEARCA: EWRI ) Guggenheim S&P Equal Weight ETF (NYSEARCA: RSP ) Guggenheim S&P 500 Pure Growth ETF (NYSEARCA: RPG ) Guggenheim S&P 500 Pure Value ETF (NYSEARCA: RPV ) Guggenheim Russell Top 50 ETF (NYSEARCA: XLG ) A couple of changes are in the works for two of the funds and will be discussed in due course. Below is a brief description of each fund. EWRI is one of the two Guggenheim ETFs that will face changes on January 27, 2016: this fund will effectively cease to exist , its portfolio will be merged with RSP . Guggenheim’s reason for the merger is that the Russell 1000 is not a pure large-cap index , but includes a substantial number of mid caps, as well. As a result, EWRI – which is intended to be a large-cap fund – overlaps with Guggenheim’s mid-cap ETF and is considered by Morningstar to be a mid-cap blend. 5 According to Guggenheim, after the change, the company’s large-cap, mid-cap and small-cap funds will be distinct and have no overlaps. 6 Guggenheim asserts that the S&P 500 , S&P 400 and S&P 600 indices unambiguously and without overlap cover the large-cap, mid-cap and small-cap stocks, respectively. Finally, RSP has outperformed EWRI , and its smaller portfolio (500 holdings as opposed to EWRI’s 1,930 – now down to 1,023) is more efficient and more easily managed. 7 The transition will involve the flow of EWRI assets to RSP in exchange for shares of RSP ; the accumulated shares of RSP will then be distributed to EWRI shareholders on a pro rata basis, with fractional shares being distributed as cash. 8 Guggenheim expects that there should be no tax liability for shareholders. 9 The fund would seem to be going through some transition pains. Based on its current NAV and ER, compared to its 2014 expenses, it has an expense efficiency 10 rating of 126.48% – too high for a fund with only $71.19 million in assets , 11 and the merger is certain to impose more costs before the fund closes. The fund’s slight assets do provide it with a higher RoNAV . 12 When RSP’s merger with EWRI is finished, the result should not have that much bearing on this prominent ETF. EWRI ‘s assets amount to less than 1% of RSP ‘s, and ultimately they should end up simply increasing the number of shares RSP has of each of its holdings – and that , by only a small margin. I have to confess that I do like this fund – primarily for the fact that it is equal-weighted and has a tendency to outperform funds that are based on the standard S&P 500 , cap-weighted, index. I have come to think of it as my “go-to” fund when I want something to use as a comparison, or when I want to test an ETF-only investment portfolio. 13 RSP offers a nice, if unremarkable yield; as we will see below, its strong suit tends to be its performance. The fund’s managers seem to be keeping the expenses down, resulting in an EER of just under 75% – taking some of the edge off the 0.40% expense ratio. Until I get a better feel for the significance of RoNAV , I will just point out that it’s 1.11% and is towards the low end for the Guggenheim funds. 14 RPG manages to present some of the better numbers of any of the Guggenheim funds, but does so while also putting up some of the more unfortunate numbers of the group. The fund’s portfolio is made up of those in the S&P 500 that show the greatest growth potential, as determined by Standard & Poor’s . Currently, the index lists 106 companies as having “strong growth characteristics.” The fund had a 46% turnover rate for its most recent fiscal year – which is described as “average.” 15 RPG ‘s expense efficiency is very nice – only 54.50% of anticipated expenses. It does have a very low yield – not the fund to turn to if you want dividend income. The lower income also results in a low return on NAV – the lowest of the five funds presented here. RPV ‘s index consists of 123 constituents of the S&P 500 that are deemed by Standard & Poor’s to have strong characteristics regarding value. RPV is perhaps the polar opposite of its sibling, RPG . Where RPG has an extremely nice EER, RPV sports one of 103.64% – over the 100% line. On the other hand, it has the highest yield of the five funds and one of the highest RoNAV of the group. The value portfolio had a turnover rate of 25%. XLG is based on the index of the 50 largest companies (by market capitalization) in the Russell 3000 index ; ETF.com calls it “the ETF for investors who don’t want to hold any companies they haven’t heard of.” 16 The fund is the second of Guggenheim’s large-cap funds that will undergo a change on January 27, 2016; on that date, XLG will have its index changed to the S&P 500 Top 50 Index . The change, according to the issuer, is intended to maintain continuity among its funds, particularly those following S&P-based indices. There should be nominal change in the holdings of XLG (which will retain its ticker, but be renamed the Guggenheim S&P Top 50 ETF ), as it currently appears to have 48 holdings in common with the 50 S&P components having the largest market caps. 17 XLG seems to excel in most measures: it has an expense margin of 91.24% , its expense efficiency is better than 94% (along with a low 0.20% ER ), its RoNAV is a group-best 1.97% , and it has a handsome 2.06% yield. Comparative Performances So, how do they actually stack up? The following chart illustrates the performance of each of the funds since their inceptions: (click to enlarge) As the key to the chart shows, looks can be deceiving. XLG would seem to be outperforming the other four, but – since its inception in 2003 – RSP has increased by 208.81% , outperforming the other four funds, with XLG actually trailing the pack with only 62.72% increase in value. 18 Of course, measuring the funds since their inceptions is misleading, as well; RSP has a two-year advantage over XLG , and a nearly three-year advantage over RPG and RPV (and a seven -year advantage over the doomed EWRI ). The following chart shows performance from the inception date for RPV and RPG : (click to enlarge) Since March 3, 2006, the growth-oriented RPG surpasses RSP by an impressive 6,000 bps – and, again, XLG trails the others. 19 The Recession After looking at both of the above charts, I was intrigued by how the funds performed during the “Great Recession”: all of the funds hit recession-period bottoms on Monday, March 9, 2009 (although, actually, RPV hit its low on the previous Friday, March 6). By all appearances, XLG took a huge tumble, compared to the other funds. How did the funds take the recession? The following chart illustrates: (click to enlarge) Interestingly, RSP and RPV hit their pre-recession highs on June 4, 2007 ($52.67 and $37.40, respectively), while RPG and XLG hit their highs on October 10 ($39.79 and $117.32, respectively). 20 In terms of percentage, both RPG and XLG suffered the least, both losing less than 54%; RSP was about 700 bps behind, at just under 61%, while RPV lost the most, dropping more than 76%. It took 17-20 months for the funds to give up their losses; recovery, for the most part, took a lot longer. RPG surpassed its pre-recession high on October 25, 2010 – 19 months after hitting bottom. RSP would take nearly two more years before reaching a new high of $52.69 on September 12, 2012. RPV would follow in six months , hitting $37.54 in March, 2013, and XLG would reach $117.63 two months later . What I find interesting here is that these funds are all drawn from the same well: the S&P 500 . RPG , RPV , and XLG are all proper subsets of RSP , which is itself a subset of the S&P 500. The S&P reached its pre-recession high of 1565.15 on October 9, 2007 – the day before RPG and XLG reached theirs. The lowest close for the S&P during the recession was 676.83 on March 9, 2009 – the same day as the Guggenheims – for a drop of 57.76%, which places it right in the middle of the Guggenheim funds. This can give us a little insight into a few things: First , RSP lost more value during the recession than either RPG and XLG presumably because RSP has significantly more smaller-capped companies. How do we come to that conclusion? Because RSP underperformed the S&P 500, even though the two would be (in principle) co-extensive, the only difference being that the S&P is cap weighted, while RSP is equal weighted. Being equal weighted, RSP places greater weight on the smaller-capped holdings than does the S&P; thus, if RSP underperforms the S&P, it would be reasonable to assume that the principle cause was the extra weight given the smaller-capped companies. Second , if smaller large-cap companies bore significant losses during the recession, we can assume that the reason for RPV’s performance during this period would be due to a larger number of smaller-capped holdings. This only goes so far as an explanation, in that there is an overlap between these funds: RPG and XLG have 17 funds in common, while RPV and XLG have eight in common (meaning some of the mega-caps are, according to S&P’s formulary, still values). 21 Third , Standard & Poor’s formula for determining growth stock seems to be spot on, as RPG recovered from the recession quicker than the other three funds, and did so by a substantial margin. I take it by “growth” they mean “quick growth” – sprinkle some Miracle-Gro on them. The 2010 “Correction” Given the performances of these funds during the recession, I thought it might be interesting to see how they fared during the recent “correction” the market experienced recently. The following chart gives an indication: (click to enlarge) The chart shows fund performances for the period from June 1, 2015 through November 20, 2015 (the prices on the far left and far right of the chart). It also shows the highest point and lowest point for each fund (the dated prices) – with all highs coming before August 25, the day “the bottom dropped out.” All four ETFs lost more than 10% of share value from their respective highs, with RPV losing the most at 15.79%. For the period illustrated, only one fund – XLG – has shown a gain in share price overall. Needless to say, none of the funds had surpassed their high points for the period. 22 Compound Annual Growth Rate (CAGR) One last consideration ought to be made before trying to “judge” these funds: what one gets from them. The following chart shows returns based on historical prices adjusted to accommodate splits and dividends: (click to enlarge) When we take into account dividends, and particularly when we look at share performance since March 9, 2009, RPV shows a measure of life it hasn’t shown thus far. The value fund’s group-leading yield pushes its fairly modest performance in all other measured data to a post-recession growth of 552.34% , outperforming nearest contender RPG by 213 percentage points. Another way of quantifying the returns realized by these funds is through their CAGR s. The following graph shows the CAGRs for each fund (including EWRI ) computed both from date of inception ( CAGR-I ) and for the five-year interval from November 20, 2010 to 2015 ( CAGR-10 ): (click to enlarge) Head-to-head over the past five years, RPV has markedly outperformed the other funds – again, largely due to its dividend yield. Of course, CAGR data can be misleading, in that it the annual returns each fund would provide as if growth was a constant , which it is not. Nevertheless, however, it is an effective way to illustrate the total returns one might expect from a holding. As illustrated above, moreover, it can show that all of the funds have realized a greater rate of growth in the past five years than is historically the case. Assessment I have to confess that I still have not worked out a way of rating the funds in some way that would be meaningful once all 121 ETFs are put together. For the time being, I am simply weighing each component of the analysis, 23 with each component bearing an equal weight – essentially, scoring is based on ordering for each component. I am trying to keep it simple, in the absence of something cogently complex. Of the five funds considered here, XLG comes out on top, with RPV just nominally behind – and this pretty much sums up two prominent approaches to investing: for growth/security [ XLG ] or for income [ RPV ]. I must confess to being slightly surprised that RPV ended up scoring as high as it did – this may be something of a sleeper. RSP and RPG tied for third place, each one showing its strengths in line with RPV and XLG , respectively. RSP was stronger on the income -based factors, while RPG was stronger in the growth elements. I am somewhat disappointed in how RSP fared. Disclaimers This article is for informational use only. It is not intended as a recommendation or inducement to purchase or sell any financial instrument issued by or pertaining to any company or fund mentioned or described herein. All data contained herein is accurate to the best of my ability to ascertain, and is drawn from the Company’s Prospectus, Statement of Additional Information, and fact sheets. All tables, charts and graphs are produced by me using data acquired from pertinent documents; historical price data from Yahoo! Finance. Data from any other sources (if used) are cited as such. All opinions contained herein are mine unless otherwise indicated. The opinions of others that may be included are identified as such and do not necessarily reflect my own views. Before investing, readers are reminded that they are responsible for performing their own due diligence; they are also reminded that it is possible to lose part or all of their invested money. Please invest carefully. 1 ” QLC: Large-Cap ETF With High-Quality Stocks .” 2 Not counting ETNs (of which there are about six) or leveraged/inverse funds (of which there are ~ 27). 3 I have discussed one such tool already, when I introduced “expense margins.” As I prepared this article I came across two more: return on NAV ( RoNAV ) and expense efficiency rating ( EER ). RoNAV has appeared in a few of my recent articles, and reflects the relationship between NAV and the net income generated therefrom. EER is meant to capture the difference between the expenses actually paid in a fund and the expense ratio on which many investors place great weight. A discussion of what these data represent – and how they are determined – can be found in my blog . 4 Of course, I will not discourage you from reading all of the articles if your tolerance for boredom is sufficiently high. 5 The Guggenheim Russell MidCap Equal Weight ETF (NYSEARCA: EWRM ). EWRM will change index to the S&P MidCap 400 index on January 27, and will become the Guggenheim S&P MidCap 400 Equal Weight ETF (EWMC). 6 Transition of Guggenheim ETFs to S&P Dow Jones Indices, a list of key considerations and FAQs. The Guggenheim Russell 2000 Equal Weight ETF (NYSEARCA: EWRS ) will become the Guggenheim S&P SmallCap 600 Equal Weight ETF (EWSC). Available here . 7 ETF.com adds some additional considerations to the reasons for the merger: 1) EWRI has not traded well, with only an approximately $216,410.00 in average daily volume (compared to RSP ‘s $64.14 million average); 2) on December 23, 2014, PowerShares issued an ETF identical to EWRI – the PowerShares Russell 1000 Equal Weight ETF (NYSEARCA: EQAL ). Implied – there’s not enough market for the ETFs to support two funds. 8 Per ETF.com . 9 Guggenheim FAQs, note 4, above. 10 See EER in note 2, above. 11 An EER > 1 means that it is spending more on expenses than “anticipated” in its expense ratio. 12 See RoNAV in note 2, above. 13 I gave the fund a thorough going-over in ” Guggenheim s RSP: Equal Weight Or Dead Weight? ” I used it for comparison purposes in the QLC article mentioned above, and as a component for a trial portfolio in ” Brown s Permanent Portfolio Vs. Porter s ETF Retirement Portfolio .” 14 Of course, as with any figure related to returns, higher is usually going to be better, but I do not expect to have a clear indication of what sort of RoNAV to expect from large-cap ETFs until I have gotten further through the project. 15 Guggenheim ETFs Prospectus, p. 6. 16 ETF.com . 17 The index itself does not appear to be available yet, and I based the comparison on a list of the top 50 S&P 500 companies generated in finviz.com . 18 On April 27, 2006, RSP underwent a 4-for-1 split. I have adjusted the prices prior to the split to reflect one-fourth of their actual value. 19 I have dropped EWRI from this and subsequent charts because: a) its performance has not been that impressive, and anyway, b) it will cease to exist in less than two months. 20 All prices are closing prices as of the day cited. 21 There are no overlaps between RPV and RPG , and this is why they are considered “pure” – the formula that determines if a holding is a value stock excludes the possibility of a growth stock being included, and vice versa. Since no specific formula is needed (in principle) to determine which stocks have the largest market capitalization, there is no consideration given to “value” or “growth” conditions. 22 XLG did come close on November 3, when its price closed at $148.31 – missing the high by $0.46. 23 Expense margin, expense ratio, expense efficiency rating, return on NAV, yield, and the two CAGRs. I am also considering counting the recovery period from recession and some meaningful assessment for performance over the recent correction.