- ETFs that track the value style may outperform
- In the recent market rally, value stocks have been outpacing the market
- The value style has also outperformed across other asset categories
As the market cools off and moves toward more stable growth, exchange traded funds that track the value style may outperform.
“Should economic conditions continue to stabilize, value stocks may be one of the bigger beneficiaries,” according to Russ Koesterich, Global Chief Investment Strategist and Head of the Model Portfolio & Solutions Business at BlackRock. “Value typically outperforms during periods when economic conditions are improving.”
In the recent market rally, value stocks have been outpacing the market. For instance, over the past month, the iShares S&P 500 Value ETF (NYSEArca: IVE) gained 7.2% while the iShares S&P 500 Growth ETF (NYSEArca: IVW) increased 6.3% and iShares Core S&P 500 ETF (NYSEArca: IVV) returned 6.8%.
The value style has also outperformed across other asset categories. Among mid-caps over the past month, the iShares S&P Mid-Cap 400 Value ETF(NYSEArca: IJJ) was up 11.2% while the iShares S&P Mid-Cap 400 Growth ETF (NYSEArca: IJK) was 9.0% higher and iShares Core S&P Mid-Cap ETF (NYSEArca: IJH) was up 10.1%.
Looking at small-caps in the past month, the iShares S&P Small Cap 600 Value Index (NYSEArca: IJS) gained 12.5%, iShares S&P Small-Cap 600 Growth ETF (NYSEArca: IJT) increased 9.9% and iShares Core S&P Small-Cap ETF (NYSEArca: IJR) advanced 11.0%.
The value style, which is currently heavy on energy and financials, also appears inexpensive. Growth stocks were trading at over three times the price-to-book value of value stocks.
“Based on this metric, the spread between U.S. large-cap value and U.S. large-cap growth is greater than at any time since the bursting of the technology bubble in 2000,” Koesterich added.
The S&P 500 Value ETF showed a 14.62 price-to-earnings and a 1.65 price-to-book. In contrast, the S&P 500 Growth ETF has a 19.34 P/E and a 3.99 P/B while the S&P 500 Index ETF was trading at a 16.7 P/E and a 2.34 P/B.
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 rapid growth in those company measures. However, with things slowing down, valuations look pricey for growth stocks.
iShares S&P 500 Value ETF