By Philip van Doorn
The S&amp;P 500's Value and Growth indexes overlap. The more narrowly concentrated versions of these indexes have been performing better.
The broadening of performance in stocks might reflect the flow of AI spending in smaller companies.
There is a long tradition of dividing stocks into value and growth camps. One might expect growth-oriented indexing strategies to be more volatile but also more lucrative during bull markets. Then again, we might be in the midst of an evolution, with more nuanced value- and growth-indexing strategies better positioned to reward investors.
The S&amp;P 500 Pure Value Index and the S&amp;P 500 Pure Growth Index have performed better than the broader growth and value indexes and the full S&amp;P 500 SPX since the end of 2024. Below is an explanation of how all of these indexes work. Nick Kalivas, Invesco's head of factor ETF strategy, shared insight as to why the &#34;pure&#34; versions of the index have been outperforming.
The arguments in favor of index funds are clear: They tend to have lower expenses than actively managed funds and it has been difficult for fund managers to beat the S&amp;P 500 over long periods.
The S&amp;P 500 is weighted by companies' market capitalization, which means it rewards success and can be highly concentrated. The State Street SPDR S&amp;P 500 ETF Trust SPY was the first exchange-traded fund to track the index when it was established in 1993. Nvidia (NVDA) alone makes up 7.5% of the SPY portfolio. If we add Apple (AAPL) and Microsoft (MSFT), the weighting of the top three holdings is more than 19%.
The cap weighting has served the S&amp;P 500 well over recent years - it is a growth-oriented index because of its weighting. The index's average annual return with dividends reinvested over the past 10 years through Friday has been 14.18%, according to data provided by LSEG. For the past 30 years, the index's average annual return has been 9.96%.
Value and growth approaches to the S&amp;P 500
S&amp;P Dow Jones Indices maintains the S&amp;P 500 along with other indexes that narrow the 500 companies to smaller groups.
The index provider scores companies in the S&amp;P 500 by value factors, including ratios of book value, earnings and sales to price. S&amp;P 500 companies are also scored by growth factors, including the three-year change in earnings-per-share divided by the current share price, the three-year growth rate of sales per share and each stock's price change over the previous 12 months.
So each stock has a value score and a growth score. The companies are ranked by each score and then ranked again by the ascending ratios of growth rank/value rank. This places the stocks into three baskets, with 33% in the value group, 33% in the growth group and 34% straddling both value and growth.
Since S&amp;P Dow Jones Indices wants the S&amp;P 500 Value and Growth indexes to be roughly equal in market cap, there are 443 companies in the S&amp;P 500 Value Index and 139 companies in the S&amp;P 500 Growth Index, with 79 companies in both of the indexes.
The largest ETFs tracking these two indexes are the iShares S&amp;P 500 Value ETF IVE and the iShares S&amp;P 500 Growth ETF IVW.
The S&amp;P 500 Value and Growth indexes are rebalanced annually in December and are adjusted quarterly. The stocks have a modified market-cap weighting, with a limit of 23% for any one company and another limit so companies with weights of more than 4.8% cannot make up more than a combined 50% of each index.
The pure indexing approaches
To remove the overlap of the S&amp;P 500 Value and Growth Indexes, S&amp;P Dow Jones Indices also maintains narrower &#34;pure&#34; versions of each, which are rebalanced annually in December. They are weighted by style score, rather than market cap.
The S&amp;P 500 Pure Value Index is made up of the 122 stocks in the S&amp;P 500 that have the highest value scores, subject to a limit on the scores to avoid a high concentration in any one stock. This index is tracked by the Invesco S&amp;P 500 Pure Value ETF RPV and the largest component of the ETF is Bunge Global (BG) with a 2.6% weighting.
The S&amp;P 500 Pure Growth Index is made up of 60 stocks among the S&amp;P 500 with the highest growth scores. With a weighting by growth score instead of market cap, you can expect performance that is differentiated from the S&amp;P 500 Growth Index and the full S&amp;P 500. Then again, hot stocks will have an increased weighting between annual rebalances. This index is tracked by the Invesco Pure Growth ETF RPG. The ETF's top holding is computer-memory manufacturer Sandisk (SNDK), which has a 4.8% weighting. Competitor Micron (MU) ranks seventh with a 2.28% weighting.
Read: Micron's stock is spectacularly cheap, as these numbers show
Despite the recent outperformance for RPV (shown below), the portfolio is still remarkably inexpensive on a forward price/earnings basis. A stock's forward P/E ratio is its price divided by analysts' consensus 12-month earnings-per-share estimate for that company. These are LSEG's forward P/E valuations for the five ETFs covered in this article, based on the weightings of their current portfolios and on estimates among analysts at brokerage and research firms polled by the data provider:
RPV's portfolio trades at a very low forward P/E when compared with that of the full S&amp;P 500.
Recent strong performance for the pure indexes, especially pure value
From the end of 2024 through Friday, the SPDR S&amp;P 500 ETF Trust returned 12.3%. Here is how the four style index ETFs discussed in this article performed over the same period. All investment returns in this article include reinvested dividends.
Since the end of 2024, the S&amp;P 500 Pure Value Index has outperformed the full S&amp;P 500, as well as the S&amp;P 500 Value Index, the S&amp;P 500 Pure Growth Index and the S&amp;P 500 Growth Index.
The Invesco S&amp;P 500 Pure Value ETF has been in the lead, while the iShares S&amp;P 500 Value ETF has brought up the rear. The second-best performer has been the Invesco S&amp;P 500 Pure Growth ETF.
Invesco's Kalivas told MarketWatch that a broadening of stock-market performance away from the largest components of the S&amp;P 500 had served the pure-value and pure-growth styles well. But this action has &#34;taken a break&#34; since the U.S. and Israel attacked Iran on Feb. 28, because of rising energy costs &#34;and worry that the previous simulative measures have been offset by energy,&#34; he said.
When the fighting subsides, he expects the broadening of performance in the stock market to resume. On the growth side, &#34;we have seen leadership changing from hyperscalers and the 'Magnificent Seven' to go down to the beneficiaries of the large capital spending&#34; on data centers to support the development of artificial intelligence technology, he said.
What we might be seeing is the result of a trend during which the hundreds of billions of dollars in spending on AI by companies such as Microsoft, Amazon.com (AMZN), Alphabet (GOOGL) and Meta Platforms (META) benefits many smaller players over the intermediate term, before the hyperscalers themselves (hopefully) reap the bulk of their own AI-driven rewards.
This is where your judgment as an investor comes into play. How long might the broadening trend - and the flow from hyperscalers to companies benefiting from their spending - continue? We have seen Sandisk's stock nearly triple this year through Friday, while Micron's is up 48%. Meanwhile, Microsoft's stock is down 20.9%, while Amazon's stock has declined 11%, Alphabet's stock has dipped 3.8% and Meta's has fallen by 10%.
Longer-term returns
All ETF returns in this article include reinvested dividends and are net of the funds' expenses. For the Invesco S&amp;P 500 Pure Value ETF, annual expenses are 0.35% of assets under management, which translates to annual fees of $35 for a $10,000 investment.
Here are the total returns for all five funds for longer periods, with the funds' expense ratios in the rightmost column:
Over the longer periods, the traditional cap-weighted approach of the S&amp;P 500 Growth Index, tracked by IVW, has been the best performer.
So the question for investors now is whether or not the recent outperformance of the pure approaches, especially for value, are the start of a long-term trend.
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-Philip van Doorn
This content was created by MarketWatch, which is operated by Dow Jones &amp; Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
03-23-26 1223ET

The S&P 500's Value and Growth indexes have been outperformed by their 'pure' counterparts, reflecting a shift in stock performance influenced by AI spending in smaller companies. The S&P 500 Pure Value and Pure Growth indexes, which focus on specific value and growth scores rather than market capitalization, have shown better returns since 2024. This trend suggests that more nuanced indexing strategies may be better positioned to reward investors, as traditional cap-weighted indexes like the S&P 500 have become highly concentrated in a few large companies.

- The S&P 500's Value and Growth indexes have shown overlapping performance, with narrower pure versions outperforming since the end of 2024.  
- Increased AI spending among smaller companies may indicate an evolving investment strategy, moving away from the largest S&P 500 components.  
- Analysts expect that performance broadening will resume, influenced by capital spending in AI, despite recent fluctuations due to geopolitical events affecting energy costs.

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Here's a big reason the S&P 500 has trailed 'pure' versions of the index that focus on value and growth