Each time the markets fumble and get back up this year, large-cap growth stocks and related exchange traded funds have led the market rebound while small-cap value has consistently fallen behind.
While many academic studies have shown that U.S. value stocks and small-caps outperform over the long-term, large-cap growth stocks have taken the lead this year.
For instance, year-to-date, the iShares S&P 500 Growth ETF (NYSEArca: IVW) rose 6.3%, Vanguard S&P 500 Growth ETF (NYSEArca: VOOG) gained 6.4% and SPDR S&P 500 Growth ETF (NYSEArca: SPYG) returned 6.0%.
Meanwhile, small-cap value plays have fallen behind this year, with the Vanguard Small-Cap Value ETF (NYSEArca: VBR) down 1.1%, iShares S&P Small Cap 600 Value Index (NYSEArca: IJS) 4.2% lower and iShares Russell 2000 Value Index (NYSEArca: IWN) down 4.1%.
Value stocks typically trade at cheaper prices relative to fundamental measures of value, such as earnings and the book value of assets. In contrast, growth stocks tend to run at higher valuations since investors expect the rapid growth in those company measures.
Moreover, the current underperformance in value stock ETFs may be affected by investment sentiment. Specifically, investors are typically more aggressive during periods of heightened volatility and would chase popular growth stocks. Since growth stocks show high multiples, investors may expect that the companies will sustain a high growth rate. In contrast, traders may feel that firms with low multiples would continue to experience tepid growth.
JPMorgan Chase recently argued that investors shouldn’t tilt toward value stocks as companies have not reached a point where they can sustain the recovery. Weighing on the value outlook, the Federal Reserve may still hike interest rates in December, and energy companies, commodity producers and other firms dependent on emerging markets are vulnerable to losses if rates rise. Additionally, there is no guarantee that a “reflation trade” benefiting value stocks will develop, especially with the consumer price index only rising 1.3% last month year-over-year and overall inflation still stubbornly below the Fed’s 2% target. [2 Reasons To Be Skeptical Of Value ETFs Surge]
Large-cap U.S. stocks have also been outperforming as global volatility kept investors to safer equity plays, or prominent and more stable brands.
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Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.