GRPM: GARP, Mid-Cap, And Discretionary Focused (NYSEARCA:GRPM)

Mid-caps, to put it simply, need more love. Everyone has been so enamored by large-caps, and speculators are trying to catch small-cap momentum (which doesn’t want to stick). Mid-caps, though? They deserve more attention. Mid-cap funds tend to have far less concentration risk than large-cap passive benchmarks, and don’t have the same fundamental risks that smaller companies tend to exhibit. If you’re a fan of mid-caps with growth at a reasonable price, then you may want to consider the Invesco S&P MidCap 400 GARP ETF (NYSEARCA:GRPM). This fund takes a fresh approach to midcap investing, blending growth with a value overlay.

GRPM tracks the S&P MidCap 400® GARP Index. The index follows the top 60 growth stocks in the S&P MidCap 400® Index, picking those with high quality and value composite scores. This method gives investors a chance to invest in midcap companies that could grow but are still priced reasonably from a fundamental perspective. GARP as a style is ultimately about trying to find companies that grow their earnings above market rates, but don’t have crazy high valuations. And honestly, it should have far more importance going forward given valuations in some of the biggest drivers of “the market” today.

A Look At The Holdings

When we look at the top holdings, we find that the largest position makes up 4.04% of the fund. There isn’t any major concentration risk to speak of.

What do these companies do? Lantheus Holdings Inc is a key player in the radiopharmaceutical industry. The company develops, makes, and sells cutting-edge diagnostic and treatment products. Roivant Sciences Ltd is a biopharmaceutical firm. Kinsale Capital Group Inc runs a specialty property and casualty insurance business. Hancock Whitney Corp provides a variety of banking, investment, and wealth management services. And Autonation is a top car seller in the United States.

Holdings like these alongside others result in a portfolio that has a Price to Earnings ratio of just 13.76x. Growth at a reasonable price for sure here.

Sector Weightings and Portfolio Composition

The Consumer Discretionary sector makes up the largest allocation at nearly 27% of the fund, with Energy and Industrials coming in 2^nd and 3^rd. I will say that I do think it’s important for investors to consider valuations when it comes to Discretionary stocks, especially when considering credit card delinquencies at this point in the cycle and credit card debt that, at some point, could adversely impact these companies and their valuations as a result.

Notice that Tech makes up just under 10% of the fund. I like this. It provides a different mix than what you get from large-cap averages, with a GARP tilt.

Peer Comparison

One fund worth comparing GRPM against is the SPDR S&P 400 Mid Cap ETF (SPMD). This is more a broad proxy for the mid-cap space. GRPM puts its focus on Consumer Discretionary, Industrials, and Energy. On the other hand, SPMD tends to concentrate on Industrials, and Financials as that fund’s top 2 sectors. When we look at a price ratio of GRPM to SPMD, we find that the GARP tilt has clearly resulted in some pretty strong outperformance over several years. The dynamic nature of where the fund positions based on fundamentals might explain why it’s done so well as sectors go in and out of favor. Performance here is indeed encouraging to see.

Pros and Cons

On the plus side, GRPM gives you access to mid-cap companies, which strike a balance between growth potential and stability. The fund’s growth at a reasonable price approach tries to find companies that show steady fundamental growth and strong financial health. Also, GRPM’s expense ratio of 0.35% stands up well against similar funds.

Still, people investing should keep in mind that GRPM’s performance can go up and down a lot. Even though there is clearly less concentration risk in the top 10 holdings than we currently see in large-cap averages like the S&P 500, the very nature of these being mid-cap companies means these companies will be more cyclical and vulnerable to economic downturns. And if we happen to hit a recession in the coming year, the Consumer Discretionary tilt would clearly be a net negative independent of valuations overall.

Conclusion

Overall, a good fund. I like the Price to Earnings ratio, the mix of stocks, the sector composition being different than large-caps, and the market-cap the fund is playing in. I think it’s worth considering rotating here away from large-caps, and would consider this a core potion of a portfolio. Just be mindful of the Consumer Discretionary tilt the fund currently has.

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