After underperforming the growth style in recent years during the bull market rally, value stocks and related exchange traded funds are beginning to pick up their pace.
“At the end of the day, these are styles,” Ben Johnson, director of global ETF research for Morningstar, said. “And like any style, they will go into and out of vogue. Value investors today are feeling a bit like they are showing up to fashion week wearing bell bottoms.”
Going into 2016, many investors gave up on the value style, which Johnson argues has historically lead to the creation of the value premium.
“Value exists because there are suckers on the other side of the poker table willing to take the flipside of the value bet,” Johnson said. “They are betting on growth or something else. Real, true, strong hands at that poker table, in all likelihood will continue for many years to come, to reap the benefits of that value bet, assuming that they are strong hands. What we are seeing right now is that there are some weak hands at the table, and they are giving up. They are folding.”
For now, the value theme seems to be back in. Plain vanilla index ETFs that track the value theme has outperformed so far this year, or at least have not done as poorly as broader benchmarks. The iShares Russell 1000 Value ETF (NYSEArca: IWD), which tracks value stocks taken from the large-cap Russell 1000 Index, fell 2.2% year-to-date. The Vanguard Value ETF (NYSEArca: VTV), which tracks the CRSP US Large Cap Value Index, dropped 1.8%. The Guggenheim S&P 500 Pure Value ETF (NYSEArca: RPV), which tracks value stocks taken from the S&P 500 index, dipped 1.7%. In contrast, the benchmark S&P 500 declined 2.4% so far this year.