IVW ETF: Sell The Bad Slice Of The S&P 500

Introduction

We continue to anticipate that ongoing increases will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.

—Fed Chair Jerome Powell, December 14, 2022 Press Conference.

These comments from Powell in the December FOMC meeting highlight one thing: the Fed is not taking its foot off the interest rate pedal. This does not bear good news for the overall stock market. Now, imagine what the outlook would be for an exchange-traded fund (“ETF”) that focuses solely on growth stocks in this high-interest rate environment…

IVW: A Proxy for S&P 500 Growth

The iShares S&P 500 Growth ETF (NYSEARCA:IVW) tracks an index of large-cap U.S. stocks. The index tracks similar stocks to the S&P 500 (SP500) except with a focus on growth stocks. Here is what the composition looks like:

IVW ETF Composition

The top 5 names in the IVW ETF are familiar tech and industry giants: Apple (AAPL), Microsoft Corp. (MSFT), Alphabet Inc. Class A (GOOGL), UnitedHealth Group (UNH), and Alphabet Inc. Class C (GOOG). The IVW is simply a growth focused version of the S&P 500.

Growth Stocks are Unattractive Right Now

From an intrinsic value perspective, the value of an enterprise is equal to the present value of its future cash flows. For growth stocks, much of the value lies in larger cash flows that come in later in the future. In finance lingo, this is called long duration equity. Naturally, the value of cash flows that occur later in the future is more sensitive to the opportunity cost of capital, which is directly tied to interest rates.

For this reason, in today’s high interest rate environment, growth stocks have suffered more than value stocks in 2022:

As can be seen in the chart above, the growth/value ratio as measured by Vanguard’s growth (VUG) and value (VTV) ETFs has declined almost 33% in 2022. In terms of the incremental outlook…

The U.S. Federal Reserve Is Not Helping Matters

2022 was marked by an aggressive monetary tightening campaign by the U.S. Fed, including delivering interest rate hikes after interest rate hikes in a bid to rein in inflation. The current U.S. interest rate sits at 4.2%, the highest level recorded since 2007, after the real estate bubble burst.

As suggested in the introduction, the Fed’s latest commentary suggests that they intend to keep raising rates going forward, albeit at smaller intervals. On the whole, this makes the prospects of growth stock outperformance more bleak; not very good news for the IVW ETF!

Given that fundamentals backdrop, here’s my read of this exchange-traded fund (“ETF”) vs the S&P 500 on a relative basis:

If this is your first time reading a Hunting Alpha article using technical analysis, you may want to read this post, which explains how and why I read the charts the way I do, utilizing principles of Flow, Location, and Trap.

Read of Relative Money Flow

The IVW/S&P 500 pair is on a sharp bearish move after confirming a bull trap at a historically critical support-turned-resistance level. IVW is now primed to mark a bearish continuation to its older support base, from which a bullish breakout emanated in early 2020. I anticipate a sharp descent to the highlighted monthly support and possibly lower over the coming months.

Read of Absolute Money Flow

For the standalone IVW ETF, a more pronounced bearish setup can be seen. After peaking at $84.41 in December 2021, the IVW breezed through the monthly support-turned-resistance at $65.33. A few months later, it staged a fake recovery, which attracted more bulls hoping for a return to previous highs. Those hopes, however, were dashed when the ETF quickly resumed its bearish march to toward the $54.86 monthly support. I believe iShares S&P 500 Growth ETF is set to retake the monthly support and possibly break lower toward the next support area at $48.44.

Summary

Overall, I think iShares S&P 500 Growth ETF will continue to underperform the S&P 500. I would recommend a sell on this ETF. Personally, I am not going so far as to short it because I believe I have found other compelling shorts, such as PennyMac Mortgage Investment Trust (PMT).