The recent out-performance in value-oriented stocks has put renewed focus on the asset category after the growth style took center stage in recent years, but value equities and related exchange traded funds have proven to enhance returns over the long run as well.
The value factor experienced some rough times during the heyday of the ongoing bull market as growth and momentum factors overshadowed the value style. With investors embracing safety this year, value stocks and the corresponding ETFs are making a comeback.
Investors who believe that value investments may just be the current flavor of the day should keep in mind that value investing is a popular long-term investment strategy.
Well-know value ETFs include the iShares S&P 500 Value ETF (NYSEArca: IVE) and the iShares MSCI USA Value Factor ETF (NYSEArca: VLUE).
VLUE “seeks to track the performance of an index that measures the performance of U.S. large- and mid-capitalization stocks with value characteristics and relatively lower valuations, before fees and expenses,” according to iShares.
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.
“While value was even cheaper in early 2016, today’s discount still places the growth/value spread more than one standard deviation below the long-term average. In other words, value stocks still look attractive relative to growth,” said BlackRock in a recent note.
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.
“To be sure relative cheapness is not a guarantee of relative outperformance, but to the extent that value stocks are cheap and the economic outlook is improving, value has a reasonable chance of continuing its run,” adds BlackRock.
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.