Exchange traded fund investors have to adapt to a dynamic market. Currently, we are seeing a shift in sector and style rotation within the equities market and vulnerability in short- and medium-term Treasuries.
In the equities space, some of last year’s outperformers are beginning to stumble, Russ Koesterich, Managing Director, BlackRock’s Global Chief Investment Strategist, said in a note. For instance, the biotech sector has declined 15% from its peak in February.
“In one sense, this shift suggests that glamorous, high-momentum types of stocks are less in vogue,” Koesterich said. “It also speaks to the fact that the market appears to be experiencing a rotation away from growth and into value styles.”
The iShares S&P 500 Growth ETF (NYSEArca: IVW) dipped 0.7% over the past month, whereas the iShares S&P 500 Value ETF (NYSEArca: IVE) rose 2.6%. [Value ETFs May be the New Black]
Koesterich attributes the shift to fading momentum trading and widening difference in relative valuations – growth stocks were trading almost at a 40% premium to value stocks as of the end of March, compared to the 10-year average of 25%.
“Should this rotation continue, one of the beneficiaries would likely be U.S. large- and mega-cap stocks, which are trading at a significant discount to small- and mid-cap areas of the market,” Koesterich added.
The SPDR S&P 500 ETF (NYSEArca: SPY) has increased 21.8% over the past year while the iShares Russell 2000 ETF (NYSEArca: IWM) is up 24.9%.
The BlackRock strategist also singles out the financial sector as a potential play on the large-cap value trend, arguing that financial stocks “appears attractive and has been seeing strong inflows recently.”