The value factor made a comeback last year, prompting investors to allocate billions of dollars in new capital to exchange traded funds focusing on value stocks.
The value factor experienced some rough times during the go-go days of the current bull market as the growth and momentum factors soundly outperformed value. With investors embracing safety this year, value stocks and the corresponding exchange traded funds are making a comeback.
Value investing is a popular long-term investment strategy. Value stocks have historically outperformed growth stocks, or companies with high earnings expectations, in almost every market over the long-haul. For instance, the MSCI USA Value Index has outperformed the MSCI USA Growth Index by an annualized 81 basis points since 1974 through September 2015.
Popular value ETFs include the Vanguard Value ETF (NYSEArca: VTV). VTV follows the tracks the CRSP US Large Cap Value Index and is one of the most widely followed value ETFs. CRSP includes sales/price and historical earnings/price ratio as well as 12-month forward earnings/price ratio and dividend yield to form its value indexes.
Some market observers believe the value factor could face some challenges this year.
“But everyone rejoicing the return of value also is facing a frightening reality: Lately the results haven’t been keeping up with the enthusiasm. Last week, the market-neutral, or long-short, version of the value category, also known as a factor, posted its worst two-day return in more than five years, according to Bloomberg portfolio analytics,” reports Dani Burger for Bloomberg.
The Guggenheim S&P Smallcap 600 Pure Value ETF (NYSEArca: RZV) has also been a standout small-cap value play. RZV has been the best performing small-cap ETF since Election Day.
The outperformance may be attributed to the small-cap, value-oriented ETFs’ tilt toward favorable sectors in the current market environment. Specifically, financials and industry, two outperforming sectors in recent weeks, make up a large portion of the funds’ underlying holdings.
“Still, it’s difficult for value to sustain a long uninterrupted run. As a factor, it’s highly cyclical, so the returns are typically choppy with periods of underperformance mixed in with times of strength. In the four days ending last Friday, the market-neutral growth factor topped value by remaining relatively unchanged as value sunk 0.8 percent,” according to Bloomberg.
As is the case with so many Vanguard ETFs, VTV has gained a following due to its paltry expense ratio. VTV charges just 0.09% per year, making it less than expensive than 92% of competing funds, according to issuer data.
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