CGUS: Promising Actively Managed ETF with a Strong Performance

The Capital Group Core Equity ETF (CGUS) is a promising, relatively new, actively managed ETF from blue-chip asset manager Capital Group, launched alongside other formidable new offerings from the well-respected asset manager in 2022, including the Capital Group Growth ETF (CGGR) and the Capital Group Dividend Value ETF (CGDV).

I’m bullish on CGUS due to its strong performance over the past year and its diversified portfolio of highly rated equities.

I view CGUS as a strong long-term core portfolio holding for investors. It includes many large-cap, blue-chip stocks typically found in the S&P 500, offering the benefits of investing in well-established, long-term winners. However, CGUS also offers additional diversification through its active management strategy and its flexibility to invest in stocks of any size and across different regions.

Additionally, I like the fact that CGUS is overseen by a team of experienced portfolio managers with significant tenure in the investment industry.

Furthermore, sell-side analysts see significant potential upside ahead for the $3.14 billion fund.

What Is the CGUS ETF’s Strategy? 

Launched in February 2022, CGUS is an actively managed fund that aims to achieve long-term growth in both capital and income. The fund can invest “in stocks of companies of any size that are believed to have the potential for capital appreciation and/or dividend payments,” according to the Capital Group.

Capital Group also explains that CGUS can serve as a complement to the S&P 500 (SPX).

Capital Group states that CGUS’s strategy combines “growth and income to potentially provide a smoother ride,” by utilizing “the Capital System, which is designed to help (its) portfolios participate in strong market environments and dampen volatility in challenging ones.” 

The Capital System employs a multi-manager structure in which portfolios are divided into segments, each managed by a portfolio manager with a different background and area of expertise. These managers collaborate and share insights but also have the ultimate flexibility to invest in their highest-conviction ideas.

Like Capital Group’s other popular funds, CGUS is run by a team of seasoned portfolio managers who collaborate and invest in their high-conviction ideas. CGUS is managed by four portfolio managers who collectively boast 119 years of investment experience

I like the fact that CGUS’s active approach enables its managers to make adjustments based on market conditions or take advantage of opportunities that emerge.

CGUS’ Dynamic Portfolio

CGUS holds 91 stocks, and its top 10 holdings account for a reasonable 37.3% of assets. 

Below, you’ll find an overview of CGUS’s top 10 holdings using TipRanks’ holdings tool. 

You’ll notice that CGUS’s top holdings may not look all that different than the top of the S&P 500. This isn’t a bad thing, as the S&P 500 and the large-cap tech stocks that dominate the index have delivered strong returns for investors in recent years. 

However, digging deeper, CGUS offers some differentiation compared to the top holdings of the S&P 500, and this is where its active management comes into play. For example, highly rated industrials like Raytheon Technologies (RTX) and GE Aerospace (GE) are among CGUS’s top 10 holdings, but they are nowhere near the top 10 of the S&P 500.

CGUS offers plenty of exposure to Information Technology stocks, with a weighting of 26.8%. However, this is lower than the weighting in an S&P 500 fund like (VOO), which is 32.5%. This leaves more room for stocks from other sectors, such as Industrials, which have a 14.8% weighting in CGUS compared to just 8.1% in VOO.

This slight difference in exposure can be useful, as it still allows investors to participate in the growth these large-cap tech stocks have enjoyed. At the same time, it provides more exposure to stocks from other sectors and perhaps offers additional downside protection, as these stocks typically have lower valuations. They could also present more upside if we see a rotation from technology to other sectors.

One key difference between CGUS and the S&P 500 is that CGUS can invest up to 15% of its assets in securities of issuers outside the U.S. Therefore, CGUS offers some geographic differentiation compared to the S&P 500 while still maintaining the bulk of its exposure to blue-chip U.S. stocks. While the United States has a 91.9% weighting within the fund, CGUS also provides investors with exposure to Canada and Latin America, Europe, and the Asia-Pacific region.

Some of CGUS’s prominent international holdings include British American Tobacco (BTI), Accenture (ACN), and Canadian Natural Resources (CNQ). These international stocks typically feature lower valuations than U.S. stocks and provide U.S. investors with some diversification beyond their home market.

You’ll also notice that CGUS’s holdings feature some fantastic Smart Scores. The Smart Score is a proprietary quantitative stock scoring system created by TipRanks. It gives stocks a score from 1 to 10 based on eight market key factors. A score of 8 or above is equivalent to an Outperform rating.

An excellent nine out of CGGR’s top 10 holdings receive Outperform-equivalent Smart Scores of 8 or above, and half feature perfect 10 Smart Scores, including Meta Platforms (META), Amazon (AMZN), Broadcom (AVGO), UnitedHealth Group (UNH) and Alphabet (GOOGL).  

CGUS earns an Outperform-equivalent ETF Smart Score of 8 out of 10. 

A Good Year for CGUS  

CGUS has not been around for very long, but it has performed well thus far and slightly outperformed the S&P 500 over the past year.

Over the past year, CGUS has delivered a total return of 29.5%, slightly outperforming the broad market VOO ETF’s total return of 27.2% over the same time frame.

While this isn’t a huge margin, it is an impressive performance and makes CGUS worth keeping an eye on for the long term.

How Much Does CGUS Cost?

CGUS sports an expense ratio of 0.33%, meaning that an investor will pay $33 in fees for every $10,000 invested in the fund annually.

While this is a bit more expensive than the fee offered by many broad market index ETFs, it isn’t an unreasonable fee for an actively managed fund like this and is actually cheaper than the fees many other actively managed funds come with. If CGUS can beat the market over the long run, then the fee will look very reasonable.

Is CGUS Stock a Buy, According to Analysts?

Turning to Wall Street, CGUS earns a Moderate Buy consensus rating based on 77 Buys, 14 Holds, and one Sell rating assigned in the past three months. The average CGUS stock price target of $45.23 implies 36.5% upside potential from current levels.

Potential Risks to Consider

Like any investment opportunity, CGUS has some risks. One is active management risk—while I appreciate the benefits that active management can bring, as discussed above, there is always the risk that an actively managed fund can underperform its benchmark or broader indices.

Another risk is that this is a fairly new fund, so it has yet to prove itself over a long time horizon.

A Strong Core Holding  

In conclusion, I’m bullish on CGUS based on its diversified portfolio of highly rated stocks. It offers many of the benefits of investing in the S&P 500 while providing some differentiation that can help investors diversify and potentially weather turbulent market conditions over time. I also appreciate that CGUS is managed by a team of experienced portfolio managers with well over 100 years of investment experience between them. Lastly, Wall Street analysts see potential upside of over 35% for CGUS over the next year.

All in all, CGUS looks like a strong long-term core holding for investors.

Disclosure