There is cyclical nature to investment factors, meaning that a certain factor can work for an extended period while another falters. Until recently, the growth factor, surprisingly, trumped the value factor for about a decade. Some would argue even longer. However, the value factor is resurgent this year, prompting some money managers to think that a long-term value-to-growth transition is underway.
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. Nevertheless, potential investors should still look under the hood of these value stock ETFs as no two are created alike and offer varying performances.
Popular value ETFs include the Vanguard Value ETF (NYSEArca: VTV). VTV follows the tracks the CRSP US Large Cap Value Index and is one of the most widely followed value ETFs. CRSP includes sales/price and historical earnings/price ratio as well as 12-month forward earnings/price ratio and dividend yield to form its value indexes.
Another widely followed value ETF is the iShares S&P 500 Value ETF (NYSEArca: IVE), which is heavily allocated to energy and financial services names. 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.[related_stories]
“In fact, so far in 2016, we’ve seen a pretty dramatic change in market leadership. It has persisted across styles, regions and sectors. Value stocks are leading the market higher – by a wide margin,” according to a Seeking Alpha analysis of value funds.
Value investing is a popular long-term investment strategy. Value stocks have historically outperformed growth stocks, or companies with high earnings expectations, in almost every market over the long-haul. For instance, the MSCI USA Value Index has outperformed the MSCI USA Growth Index by an annualized 81 basis points since 1974 through September 2015.
In a post on the ETFtrends.com Strategist Channel earlier this year, Robert Leggett, CFA, of TOPS/ValMark Advisers noted, “If companies with higher EPS growth rates are undervalued as a class, they can actually represent a significant portion of Value, rather than Growth. At any rate, longer term “reversion to the mean” tendencies clearly favor lower value (which can improve) over faster price momentum (which can worsen).”
iShares S&P 500 Value ETF
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.