Value-oriented stock exchange traded funds have been outperforming and may continue to lead the markets as we head toward the late business cycle and after falling behind the growth style in recent years.
“Value was the best performing factor for the second consecutive quarter in Q4, outperforming the S&P 500 Index by 4.14%,” Andrew Ang, Head of Factor Based Investing Strategies at BlackRock, said in a research note.
For instance, the iShares S&P 500 Value ETF (NYSEArca: IVE), Vanguard S&P 500 Value ETF (NYSEArca: VOOV) and SPDR S&P 500 Value ETF (NYSEArca: SPYV) gained 10.4% over the past three months.
Investors have also begun shifting into the value play. Ang pointed out that the value-themed iShares MSCI USA Value Factor ETF (NYSEArca: VLUE) attracted almost $1 billion in net inflows over the fourth quarter, or 55% of overall single factor ETF flows.
In contrast, the 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 about 5.1% over the past three months.
Meanwhile, the blended iShares Core S&P 500 ETF (NYSEArca: IVV), Vanguard 500 Index (NYSEArca: VOO) and SPDR S&P 500 ETF (NYSEArca: SPY) advanced 7.8%.
Value stocks usually trade at lower prices relative to fundamental measures of value, like earnings and the book value of assets. On the other hand, growth-oriented stocks tend to run at higher valuations since investors expect the rapid growth in those company measures, but more are growing wary of high valuations, especially as the U.S. equities market moves toward the ninth year of an extended bull run.
“Value looks particularly attractive in the months ahead, given projections for economic reflation and favorable valuations, among other likely tailwinds,” Ang said.
The outperformance in value may be attributed to this overweight positions in some of the more attractively priced areas of the market that have been outpacing the broader markets. For instance, the S&P 500 Value ETFs all have heft 27% tilts toward the financial sector, which has been the best performing segment since the November elections. Additionally, the value ETFs are overweight energy at about 12%.
In contrast, the S&P 500 Growth ETFs are overweight 34% in information technology, which has been one of the worst performing sectors over the past three months.
“We have a positive outlook for value and move from neutral to overweight this quarter,” Ang added. “Value has posted strong returns since July resulting in marked improvement in its relative strength. Valuations remain attractive despite several strong months of performance. Our measure of dispersion, which measure the magnitude of the value spread between cheap and expensive stocks, indicates a robust opportunity set for value investors.”