Today, I would like to continue my series of articles assessing exchange-traded funds that are focused on long-duration equities with a discussion of the Nuveen Growth Opportunities ETF (NYSEARCA:NUGO). NUGO has been clearly capable of exploiting the prevailing market narrative, as it has delivered a 26.37% return this year, massively beating the iShares Core S&P 500 ETF (IVV), which is worth appreciating. Nevertheless, it has a few disadvantages that make it only a Hold.
In my view, the primary issue is that since its launch in 2021, NUGO has been unable to outmaneuver a few of its growth factor-focused peers, with volatility that has been hardly comfortable, chiefly because of its concentrated approach. For example, it has trailed the passively managed Schwab U.S. Large-Cap Growth ETF (SCHG) by 1.14%. This is especially disappointing, assuming NUGO is managed actively. However, there are a few nuances, as its returns look more compelling over shorter periods. This matter will be given due attention below in the note.
The second disadvantage is its expense ratio of 56 bps. The simpler growth factor-focused vehicles offer much more competitive ERs, with SCHG’s ER, for instance, standing at 4 bps. As to the factor mix its portfolio is offering at the moment, I see a few strong spots, chief among them being the growth and quality balance, which nonetheless cannot justify a Buy rating.
NUGO strategy: active approach to growth-stock selection
Incepted in September 2021, NUGO was initially a semi-transparent product. However, as we know from its website, in November 2023, the ETF switched to a fully transparent model without changing the strategy. Its cornerstone principles are described in the summary prospectus. More specifically, it is managed actively and compares its returns to the Russell 1000 Growth Index. The fund is focused on “U.S. companies with market capitalizations of at least $1 billion,” with the idea to select no less than 40 but no more than 65 stocks. As to the characteristics NUGO portfolio managers are looking for, it is explained that they
…attempt to include securities in the Fund’s portfolio that exhibit the greatest combination of earnings growth, quality business fundamentals, and attractive valuation relative to the broader market and peer group. The portfolio managers ordinarily look for several of the following characteristics when analyzing companies for potential inclusion within the Fund: attractive earnings growth, strong cash-flow outlook, a commitment to research and development, proprietary products and/or services, exposure to areas with emerging or expanding market share, a well-capitalized balance sheet, favorable or improving return on invested capital, integrity of the management team, and attractive relative valuation.
The strategy is flexible when it comes to foreign equities since up to a fifth of the net assets might be allocated to ADRs as well as “common stocks of non-U.S. issuers,” with companies from emerging markets also welcome. For context, one of the ADRs in the NUGO portfolio as of June 27 is Novo Nordisk A/S (NVO), a Bagsvaerd, Denmark-based pharmaceuticals industry heavyweight. NVO accounts for 1.78% of the net assets.
NUGO performance leaves a lot to be desired, but nuances do exist
Reviewing an ETF’s performance in isolation is clearly not something a shrewd investor would do. Here, there are a few options to choose from. First, it is possible to simplify the process and benchmark a vehicle of interest against the market proxied with an ETF that an investor finds most apt. I usually use IVV. Second, it makes sense to compile a peer group, with the selection process guided by strategy and style similarities and perhaps other considerations like AUM size. Today, I would like to do both plus check whether NUGO could outperform the ETF that tracks its benchmark. The periods of interest include October 2021–June 2024 as well as September 2022–June 2024. The latter was added as the JPMorgan Active Growth ETF (JGRO) was incepted in August 2022.
Let us start with the longest period. Here, I would like to juxtapose NUGO’s results with those of the Invesco QQQ Trust ETF (QQQ), SCHG, and the iShares Russell 1000 Growth ETF (IWF). IVV was selected as a benchmark.
Metric | NUGO | IVV | QQQ | IWF | SCHG |
Start Balance | $10,000 | $10,000 | $10,000 | $10,000 | $10,000 |
End Balance | $13,428 | $13,238 | $13,633 | $13,567 | $13,812 |
CAGR | 11.32% | 10.74% | 11.93% | 11.73% | 12.46% |
Standard Deviation | 21.75% | 18.38% | 23.42% | 21.76% | 22.89% |
Best Year | 45.37% | 26.32% | 54.85% | 42.60% | 50.11% |
Worst Year | -32.73% | -18.16% | -32.58% | -29.31% | -31.80% |
Maximum Drawdown | -34.58% | -23.93% | -32.58% | -30.75% | -31.80% |
Sharpe Ratio | 0.45 | 0.46 | 0.46 | 0.47 | 0.48 |
Sortino Ratio | 0.67 | 0.71 | 0.68 | 0.7 | 0.73 |
Benchmark Correlation | 0.94 | 1 | 0.93 | 0.96 | 0.94 |
Upside Capture | 114.58% | 100% | 121.25% | 114.41% | 120.4% |
Downside Capture | 113.46% | 100% | 118.11% | 111.86% | 115.47% |
Data from Portfolio Visualizer
So, we see a picture that does not unequivocally speak against NUGO. First, it did beat IVV. The nuance here though is that it was achieved only because of NUGO’s stellar June 2024 performance (an 8.5% return, the best in the group concerned), and over the October 2021–May 2024 period, it trailed all the selected ETFs, delivering an annualized total return of 8.32%.
Nevertheless, while it eked out a total return stronger than that of IVV, it underperformed all the other ETFs, including the fund that tracks its benchmark. Besides, it had the deepest maximum drawdown and the lowest risk-adjusted returns (Sharpe and Sortino ratios).
Next, during September 2022–June 2024, with IVV again selected as a benchmark, NUGO looks much stronger, with the highest CAGR in the group. The main driver here was its upside capture ratio, illustrating that it excelled in exploiting the post-bear market narrative that has been mostly revolving around lower inflation, expectations for interest rate cuts, and a boost to tech earnings from AI adoption.
Metric | NUGO | JGRO | QQQ | IWF | SCHG | CGGR | IVV |
Start Balance | $10,000 | $10,000 | $10,000 | $10,000 | $10,000 | $10,000 | $10,000 |
End Balance | $17,073 | $15,889 | $16,235 | $15,838 | $16,403 | $15,607 | $14,221 |
CAGR | 33.88% | 28.73% | 30.25% | 28.51% | 30.99% | 27.48% | 21.18% |
Standard Deviation | 18.67% | 18.68% | 20.64% | 18.76% | 19.64% | 19.18% | 16.84% |
Best Year | 45.37% | 37.74% | 54.85% | 42.60% | 50.11% | 42.18% | 26.32% |
Worst Year | -7.06% | -6.23% | -10.65% | -7.85% | -10.29% | -5.94% | -2.34% |
Maximum Drawdown | -9.62% | -8.85% | -10.65% | -9.73% | -10.29% | -9.19% | -9.23% |
Sharpe Ratio | 1.42 | 1.2 | 1.16 | 1.19 | 1.24 | 1.12 | 0.95 |
Sortino Ratio | 2.49 | 2.1 | 1.98 | 1.99 | 2.13 | 2.02 | 1.55 |
Benchmark Correlation | 0.93 | 0.94 | 0.9 | 0.95 | 0.92 | 0.95 | 1 |
Upside Capture | 131.25% | 122.33% | 131.03% | 121.48% | 129.39% | 120.66% | 100% |
Downside Capture | 94.97% | 102.7% | 109.49% | 102.35% | 104.04% | 105.4% | 100% |
Data from Portfolio Visualizer
NUGO portfolio: a pronounced growth tilt assisted by decent quality exposure
As of June 27, NUGO had 42 stocks in its portfolio, with the trillion-dollar club having an almost 57% weight. NVIDIA (NVDA) is its key position with a 13.4% weight. It should be noted that the ETF has a close to 76% overlap with QQQ, as my calculations illustrated. This does not surprise me. For context, JGRO had a 63% overlap with QQQ in January of this year.
Regarding the GICS industries, NUGO is overweight in internet software & services (23.2%), software (18.9%), and semiconductors & semiconductor equipment (18.87%). Health care providers & services is the smallest industry in the mix, with a 54 bps weight.
Value and growth
Under the hood, the overwhelming majority of NUGO’s holdings are mega-caps (87.6% weight), with the weighted-average market cap standing at $1.71 trillion, as per my calculations. SMID names are absent completely.
Even though “attractive valuation relative to the broader market and peer group” is among the factors assessed by the managers, I should say that the portfolio is currently extremely expensive. I have not found any stocks with a B- Quant Valuation grade or better. Stocks with a D+ grade or lower account for 98.7%. The weighted-average adjusted earnings yield is too compressed at 2.3%, as per my analysis; it was calculated with three loss-making companies removed (1.6% weight). At this point, the S&P 500 has an EY of approximately 3.7%. NUGO’s debt-adjusted EY (EBITDA/EV) is just slightly better at 2.5%. But why is this portfolio so expensive? It is offering tremendous growth rates, though with nuances.
First, 81.8% of the holdings have a B- Quant Growth grade or higher. This is one the largest results I have seen to date. Second, the WA forward growth rates are outstanding.
EPS Fwd | Revenue Fwd | EBITDA Fwd |
30.97% | 21.25% | 37.88% |
Calculated by the author using data from Seeking Alpha and the ETF
However, all three figures are boosted by just one name, NVDA.
Adjusted EPS Fwd | Adjusted Revenue Fwd | Adjusted EBITDA Fwd |
14.79% | 10.42% | 16.33% |
Calculated by the author using data from Seeking Alpha and the ETF
Adjusted for its impact, they look less impressive but are still robust.
Quality
NUGO has a lot to offer on the quality front. First, it has spectacularly large exposure to companies with an A (A- and A+ included) Quant Profitability grade, with 95.7% allocated. Second, Return on Assets and adjusted Return on Equity (as usual, negative figures and those above 100% were removed) are obviously solid at 20.7% and 21.6%, respectively. ROA is especially interesting since it is about 2x larger than my target, as it is boosted by NVDA, NVO, and Apple (AAPL). And third, the weighted-average net income margin is close to 27%.
Final thoughts
Though strategically I am tilting toward the view that the quality and value combination is one of the strongest to own as it will most likely offer more safety during a correction, and corrections are inevitable in the future, tactically, it is growth plus quality that should reward investors generously, assuming the dominant market narrative supported by dovish expectations, a resilient economy, and AI advancements that should strengthen the bull case for tech FCF and earnings. Looking at the macro, the recently presented May PCE price index data are also supportive of this view. And NUGO has solid growth exposure backed by impressive quality.
That said, I am skeptical about NUGO as a vehicle to navigate the continuing growth rally. As discussed above, it was unable to outmaneuver the QQQ nor the fund that tracks its benchmark over the October 2021–June 2024 period. Its expense ratio is rather burdensome at 56 bps. All in all, I believe NUGO is a Hold.
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