Warren Buffett said, “it’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” This strategy is known as Growth At Reasonable Prices (GARP) investing, and it was further popularized by legendary fund manager Peter Lynch. GARP focuses on identifying companies with strong fundamentals and growth potential while avoiding overpaying for them.
To determine reasonable prices, the Price/Earnings to Growth (PEG) ratio is used. If a stock is growing at a high rate, a relatively higher Price/Earnings (PE) ratio may still be considered reasonable by dividing the PE ratio by the growth rate (PEG ratio). A PEG ratio below 1 is generally deemed acceptable. For example, if a stock is growing at 100% while its PE ratio is 50. The share price is considered reasonable because its PEG ratio is less than 1 (50/100 = 0.5).
However, implementing GARP requires significant effort and research. Investors can consider using the Invesco S&P 500 GARP ETF (SPGP) as a convenient option.
This ETF follows the S&P 500 GARP Index, which identifies the top 150 growth stocks from the S&P 500 based on their growth scores. From these, the top 75 stocks with superior Quality & Value (QV) Composite Scores are selected, considering factors like financial leverage ratio, return on equity, and earnings to price ratio.
Investors should note that this is a pure quantitative method and no qualitative analysis was involved. But still the results have been impressive. Since 2011, SPGP has generated 16.6% per year, beating the returns of Berkshire Hathaway and S&P 500 of 13.9% and 13.7% respectively. This ETF also made my list of the Best ETFs for 2024.
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The current top 10 holdings of the ETF are provided, showing that even the largest holding’s weight is below 3%. There is no concentration risk as with other indices like Nasdaq 100.
Presently, the ETF has significant exposure to the energy and tech sectors, likely influenced by their strong performance in the previous year. That said, it has exposure to all the sectors, further confirming the diversified nature of its holdings.
Lastly, the expense ratio of SPGP is also reasonable at 0.33%. Although it is higher than SPY’s expense ratio of 0.0945%, SPGP managed to outperform SPY even after considering the higher fees. As a result, investors still experience a larger net gain.
In summary, the GARP concept has proven successful through the Invesco S&P 500 GARP ETF (SPGP), offering growth-oriented investors a convenient way to invest in promising growth stocks at reasonable prices without conducting individual research on valuations.
