After another strong year for growth stocks and related exchange traded funds, some may be shifting their investment portfolios toward more inexpensive value plays. However, it may be too soon to ditch your growth stock exposure.
Year-to-date, the S&P 500 growth stocks ETFs, including iShares S&P 500 Growth ETF (NYSEArca: IVW), Vanguard S&P 500 Growth ETF (NYSEArca: VOOG) and SPDR S&P 500 Growth ETF (NYSEArca: SPYG), returned 6.1%.
Meanwhile, the iShares Russell 1000 Value ETF (NYSEArca: IWD), which tracks value stocks taken from the large-cap Russell 1000 Index, fell 2.8% year-to-date. The Vanguard Value ETF (NYSEArca: VTV), which tracks the CRSP US Large Cap Value Index, was up 0.3%. The iShares S&P 500 Value ETF (NYSEArca: IVE), which includes value names taken from the S&P 500, dipped 2.0%.
Some big names, including strategists at Bank of America, JPMorgan, Barclays and PIMCO, are now looking for inexpensive stocks to outperform next year as value stocks are expected to do better in an environment of firming economic growth and rising rates, reports Luke Kawa for Bloomberg.
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.
However, HSBC argues that investors should hold off on a style rotation.
“2016 will be a ‘more of the same year’ as non-cyclical growth and momentum will be the key alpha strategies again,” analyst Volker Borghorr said in a research note. “The world has not really changed with regard to style investing in the last three years and we doubt that 2016 will deliver a big swing.”
Weighing on the value outlook, the Federal Reserve may still hike interest rates, 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 showing tepid increases and overall inflation still stubbornly below the Fed’s 2% target.
Consequently, investors may target more cyclical U.S. stocks through growth-oriented ETFs. For instance, the PowerShares QQQ (NasdaqGM: QQQ) tracks the Nasdaq-100 and includes a heavy 55.4% tilt toward the tech sector, along with a 20.5% position in consumer cyclical.
Investors can also target growth-specific index ETFs, like the iShares Russell 1000 Growth ETF (NYSEArca: IWF) and Vanguard Growth ETF (NYSEArca: VUG). IWF takes growth picks from the large-cap universe of Russell 1000 stocks. VUG selects picks from the largest 85th percentile of the U.S. stocks. The ETFs overweight tech and discretionary names as well.
Investors can also capture mid cap growth stocks through the iShares Russell Mid-Cap Growth ETF (NYSEArca: IWP), Vanguard Mid-Cap Growth (NYSEArca: VOT), iShares S&P Mid-Cap 400 Growth ETF (NYSEArca: IJK) and Guggenheim S&P Midcap 400 Pure Growth ETF (NYSEArca: RFG). These funds also include heavy positions in consumer discretionary, industrials and technology sectors.
Lastly, for smaller company exposure with a growth style tilt, the iShares Russell 2000 Growth ETF (NYSEArca: IWO), Vanguard Small-Cap Growth ETF (NYSEArca: VBK) and iShares S&P Small-Cap 600 Growth ETF (NYSEArca: IJT) focus on the small-capitalization growth asset class category.
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Max Chen contributed to this article.