Do growth ETFs fall victim to to buying high/selling low?

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sp_admiral
Posts: 16
Joined: Fri May 15, 2020 1:21 pm

Do growth ETFs fall victim to to buying high/selling low?

Post by sp_admiral »

I've started looking into VUG (Vanguard Growth ETF) that seeks to track the performance of the CRSP US Large Cap Growth Index.

Reading up on the underlying index (http://www.crsp.org/products/investment ... owth-index) it looks like a mix of market cap and future EPS is used to determine which stocks are growth and how they should be ranked.

Here is my concern... looking at the CRSP quarterly report it looks like:
- Weight in high performing/overvalued stocks increases as the price goes up.
- Weight in underperforming/undervalued stocks goes down as the price goes down.

Isn't this the opposite of buy low, sell high?

For example, wouldn't this force the fund manager to buy Apple shares when they're expensive and sell Boeing shares when they are cheap?

Or have I misunderstood how this all works? :o
pkcrafter
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Re: Do growth ETFs fall victim to to buying high/selling low?

Post by pkcrafter »

sp_admiral wrote: Sat Sep 12, 2020 9:51 am I've started looking into VUG (Vanguard Growth ETF) that seeks to track the performance of the CRSP US Large Cap Growth Index.

You, like many inexperienced investors, have been "looking into" VUG lately. The reason, of course, is stellar recent returns. Recent returns are not a good way to select long term funds. The performance and returns have already been locked in. The recent performance is not going to continue at the recent current pace.

Reading up on the underlying index (http://www.crsp.org/products/investment ... owth-index) it looks like a mix of market cap and future EPS is used to determine which stocks are growth and how they should be ranked.

Here is my concern... looking at the CRSP quarterly report it looks like:
- Weight in high performing/overvalued stocks increases as the price goes up.
- Weight in underperforming/undervalued stocks goes down as the price goes down.

Here is Vanguard's strategy with VUG


https://investor.vanguard.com/etf/profile/VUG

Consider Vanguard total stock market.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
Topic Author
sp_admiral
Posts: 16
Joined: Fri May 15, 2020 1:21 pm

Re: Do growth ETFs fall victim to to buying high/selling low?

Post by sp_admiral »

pkcrafter wrote: Sat Sep 12, 2020 10:37 am
sp_admiral wrote: Sat Sep 12, 2020 9:51 am I've started looking into VUG (Vanguard Growth ETF) that seeks to track the performance of the CRSP US Large Cap Growth Index.

You, like many inexperienced investors, have been "looking into" VUG lately. The reason, of course, is stellar recent returns. Recent returns are not a good way to select long term funds. The performance and returns have already been locked in. The recent performance is not going to continue at the recent current pace.

Reading up on the underlying index (http://www.crsp.org/products/investment ... owth-index) it looks like a mix of market cap and future EPS is used to determine which stocks are growth and how they should be ranked.

Here is my concern... looking at the CRSP quarterly report it looks like:
- Weight in high performing/overvalued stocks increases as the price goes up.
- Weight in underperforming/undervalued stocks goes down as the price goes down.

Here is Vanguard's strategy with VUG


https://investor.vanguard.com/etf/profile/VUG

Consider Vanguard total stock market.

Paul
Thanks for the response Paul. I have been a long-time holder of VTI; 10+ years and it is a great ETF overall.

I am not interested in buying VUG at the moment (would be the definition of buying high). I am more curious to learn how turnover works in sector or growth specific ETFs.

In the future, I may buy a bit of VUG or some other ETF to scratch my itch at owning/being more exposed to tech stocks; a sector I work in.

But for now I'm just here to learn. Not planning on letting go of VTI :)
Robert20
Posts: 185
Joined: Fri Apr 10, 2020 10:51 pm

Re: Do growth ETFs fall victim to to buying high/selling low?

Post by Robert20 »

sp_admiral wrote: Sat Sep 12, 2020 9:51 am I've started looking into VUG (Vanguard Growth ETF) that seeks to track the performance of the CRSP US Large Cap Growth Index.

Reading up on the underlying index (http://www.crsp.org/products/investment ... owth-index) it looks like a mix of market cap and future EPS is used to determine which stocks are growth and how they should be ranked.

Here is my concern... looking at the CRSP quarterly report it looks like:
- Weight in high performing/overvalued stocks increases as the price goes up.
- Weight in underperforming/undervalued stocks goes down as the price goes down.

Isn't this the opposite of buy low, sell high?

For example, wouldn't this force the fund manager to buy Apple shares when they're expensive and sell Boeing shares when they are cheap?

Or have I misunderstood how this all works? :o
Why dont u have 50% VTI and 30% VUG (if u have 80% in US)?.
MotoTrojan
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Re: Do growth ETFs fall victim to to buying high/selling low?

Post by MotoTrojan »

Over the long term growth has underperformed the market with value outperforming. It’s not necessarily buying high and selling low that breaks it, but over extrapolation of growth rates (with value over extrapolating the downside).
Robert20
Posts: 185
Joined: Fri Apr 10, 2020 10:51 pm

Re: Do growth ETFs fall victim to to buying high/selling low?

Post by Robert20 »

sp_admiral wrote: Sat Sep 12, 2020 9:51 am I've started looking into VUG (Vanguard Growth ETF) that seeks to track the performance of the CRSP US Large Cap Growth Index.

Reading up on the underlying index (http://www.crsp.org/products/investment ... owth-index) it looks like a mix of market cap and future EPS is used to determine which stocks are growth and how they should be ranked.

Here is my concern... looking at the CRSP quarterly report it looks like:
- Weight in high performing/overvalued stocks increases as the price goes up.
- Weight in underperforming/undervalued stocks goes down as the price goes down.

Isn't this the opposite of buy low, sell high?

For example, wouldn't this force the fund manager to buy Apple shares when they're expensive and sell Boeing shares when they are cheap?

Or have I misunderstood how this all works? :o
I dont think VUG is doing anything wrong.. See the history (10years+)..
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JoMoney
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Re: Do growth ETFs fall victim to to buying high/selling low?

Post by JoMoney »

sp_admiral wrote: Sat Sep 12, 2020 9:51 am... Isn't this the opposite of buy low, sell high? ...
No, because "momentum" is also a thing.
Sometimes things that have gone up, continue to go up further, and the things that have gone down, continue to go down further.
It doesn't always go that way, but neither does the opposing style, value, which is geared more towards "mean reversion", expecting that things that have gone down will go back up, and that the things that recently went up will go down.

Neither of those styles is an implication that the current market price is wrong, and that the future price is more or less likely to go in either direction.
If you don't have some other info, better than the market, I don't see how either strategy is anything better than flipping a coin and thinking that just because it was "heads", that somehow the prior flip will impact the outcome of a subsequent coin flip.

FWIW, I own a broad-market "blend" fund, with no particular style tilt. I try to keep my gambling urges out of my savings/investment... but from a gamblers perspective, I have to say I have a preference for the momentum style...
Cut your losers, and let your winners run... Don't cut your flowers to water your weeds...
A roulette player once told me he would never play the "cold" numbers. I don't remember his words precisely, but the essential idea was that the roulette wheel probably isn't biased, but if it was biased for some unknown reason, he'd rather be certain he was avoiding numbers it might be biased against.
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Steve Reading
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Re: Do growth ETFs fall victim to to buying high/selling low?

Post by Steve Reading »

sp_admiral wrote: Sat Sep 12, 2020 9:51 am Here is my concern... looking at the CRSP quarterly report it looks like:
- Weight in high performing/overvalued stocks increases as the price goes up.
- Weight in underperforming/undervalued stocks goes down as the price goes down.
Yes, this is true.
sp_admiral wrote: Sat Sep 12, 2020 9:51 am For example, wouldn't this force the fund manager to buy Apple shares when they're expensive and sell Boeing shares when they are cheap?
No because VUG is a capitalization-weighted fund. So the fund doesn't need to buy additional Apple shares after Apple rises; the Apple shares they already had go up in price by the exact percentage required.

All cap-weighted funds act that way, including VTI.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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