Quick Read
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Value without abandoning the S&P 500: SPYV keeps broad market exposure while emphasizing companies with lower valuations and reducing technology concentration.
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Growth with valuation discipline: SPGP combines growth, value, and quality screens to target companies with stronger fundamentals at more reasonable prices.
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Know the trade-offs: Both ETFs sacrifice some diversification and can underperform the broad market, making them better suited as strategic tilts rather than guaranteed upgrades to a traditional S&P 500 index fund.
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The S&P 500 hit fresh all-time highs again in August, and the hockey-stick-shaped price chart isn't the only sign that valuations may be getting stretched. As of Aug. 4, the index was trading at a price-to-earnings ratio of roughly 26 times. Put another way, investors are paying about $26 for every $1 of earningsgenerated by the average company in the index.
Now, I'm not looking to bet against the S&P 500. It's one of the hardest benchmarks to beat over the long run. The combination of ultra-low-cost index funds, excellent market liquidity, and a market-cap-weighted methodology that naturally lets winning companies grow into larger positions has proven remarkably effective.
That said, some investors understandably become uncomfortable when valuations climb this high. If you still like the broad universe of S&P 500 companies but would prefer to reduce exposure to the market's most expensive names, there are a handful of smart beta ETFs designed specifically for that purpose.
There are trade-offs, of course. Greater specialization typically means fewer holdings, larger sector bets, and higher expense ratios. These funds can absolutely underperform a plain-vanilla S&P 500 index fund over long periods. Still, I think they're generally a more disciplined approach than trying to identify overpriced stocks one by one.
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A Simple Value Til t
The first option is the State Street SPDR Portfolio S&P 500 Value ETF (SPYV). Despite using a factor strategy, SPYV remains remarkably inexpensive with a 0.04% expense ratio, meaning a $10,000 investment costs just $4 annuallyin management fees. It's also well established, with approximately $36 billion in assets under management.
The easiest way to think about SPYV is as the S&P 500 with a modest value tilt. Rather than replacing the S&P 500 universe altogether, the ETF starts with the same companies before emphasizing those with stronger value characteristics based on metrics such as price-to-book, price-to-earnings, and price-to-sales ratios.
Holdings remain market-cap weighted, so larger companies continue to receive larger allocations. The result is a portfolio of 437 holdings, slightly fewer than the full S&P 500. Sector exposure shifts noticeably as well. Technology falls to 19.67%of the portfolio, while financials become the largest overweight at 16.29%, followed by healthcare at 12.28%.
Valuations are also somewhat more attractive. The underlying S&P 500 Value Index currently trades at roughly 23 times earnings, compared with about 26 timesfor the broader S&P 500. Investors also receive a modest income boost through a 1.65% 30-day SEC yield.
Growth at a Reasonable Price
If you aren't ready to embrace value investing outright, another option is the Invesco S&P 500 GARP ETF (SPGP). GARP stands for Growth at a Reasonable Price, an investing philosophy popularized by Peter Lynch that seeks companies combining solid earnings growth with sensible valuations.
Rather than simply chasing the fastest-growing companies, SPGP uses a quantitative methodology that scores S&P 500 constituents based on growth characteristics alongside a combined value and quality score. The 75 highest-scoring companiesare selected and weighted according to their growth scores, with the portfolio rebalanced and reconstituted semiannually.
The valuation profile is surprisingly attractive. As of Aug. 4, the portfolio traded at just 15.38 times earnings, considerably below both the S&P 500 and even SPYV. The trade-off is concentration. With only 75 holdings, SPGP is much less diversified than a traditional index fund, and sector weights can look quite different from the broader market.
Financials currently account for 31%of assets, followed by technology at 16.6%, with consumer discretionary and industrials each representing roughly 14%. Investors also pay more for the strategy, with a 0.36% expense ratioreflecting its more specialized smart beta methodology.
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