As many look to repositioning their portfolios with U.S. equities trading near record highs, investors should consider ETFs with a value tilt.
“Trying to determine the best time to get back in the market can be an impossible exercise. For investors, we believe the question isn’t ‘Should I Invest in Stocks?’ but rather, ‘What Is the Best Way to Invest in Stocks?'” according to OppenheimerFunds.
U.S. equities have surged to record highs in the post-Trump rally, with growth stocks leading the charge. Looking at valuations, or a measure of stock prices in relation to underlying companies’ worth, like earnings or revenue, stocks are now trading near historically high valuations.
Price-to-sales ratios at current levels have not been seen since the tech bubble. According to FactSet data, the forward 12-month price-to-earnings ratio of the S&P 500 is 18.0, compared to the 5-year average P/E of 15.7 and the 10-year average of 14.1.
Valuations is particularly worrisome for passive investors whom largely rely on traditional, market capitalization-weighted index funds, which mirror an index and weight components by each company’s market capitalization. As the markets strengthen and break new highs, investors in market-cap funds will have greater exposure to company stocks that have increased in price the most, which leaves many exposed to sudden bouts of devaluation.
Specifically, the recent bull market record run up has been driven by technology stocks, and tech names make up a hefty 25% tilt in the S&P 500, with major components like Apple (NasdaqGS: AAPL), Microsoft (NasdaqGS: MSFT), Amazon.com (NasdaqGS: AMZN) and others among the top holdings.
As investors seek out new ways to diversify their portfolio risks, many may look to value-oriented strategies, such as one that weights securities by companies’ revenue in an attempt to avoid the risk of overpriced stocks.