Dating back to last year, investors have been favoring exchange traded funds dedicated to the value factor over those ETFs offering exposure to the growth factor. That theme is continuing in 2017 and it is prompting some departures from a well-known growth ETF.
The Vanguard Growth ETF (NYSEArca: VUG) has been bleeding assets as investors flock to value funds. 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.
VUG tracks the CRSP US Large Cap Growth Index. The ETF holds 323 stocks, including popular growth fare such as Apple Inc. (NASDAQ: AAPL), Google parent Alphabet Inc. (NASDAQ: GOOG), Amazon.com Inc. (NASDAQ: AMZN) and Facebook Inc. (NASDAQ: FB).
“On Tuesday, withdrawals from Vanguard’s growth exchange traded fund, ticker VUG, reached $900 million, the second most in its 12 year history. With $23 billion in assets, it’s the second-biggest such product in the world,” reports Luke Kawa for Bloomberg.
Cyclical stocks, like materials, industrials, energy and technology companies, are more economically sensitive and do well when the economy is improving. With the Federal Reserve set to hike rates, the rising rate environment would signal a better economic outlook. However, VUG allocates 45.5% of its weight to tech and consumer discretionary names.
“Vanguard’s growth ETF has climbed 5.5 percent since Donald Trump’s Nov. 8 election, while its value fund has jumped more than 8 percent. Investors have taken note, sending nearly $215 million a day to value-oriented ETFs with more than $2 billion in assets, compared with just $53 million for their growth-focused counterparts,” according to Bloomberg.
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.
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Tom Lydon’s clients own shares of AAPL, GOOG, AMZN and FB.
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.