Value stocks are proving sturdy this year, as highlighted by the fact that the S&P 500 Value Index is flat on the year while the S&P 500 is lower by 4%.
Adding dividends to the mix enhances the value proposition. Take the case of the ALPS Sector Dividend Dogs ETF (SDOG), which is up more than 3% year-to-date. SDOG has obvious value characteristics, and its investors are being rewarded accordingly this year.
SDOG’s sturdiness and that of the broader value complex through the first quarter shouldn’t be construed as limited upside. Some experts argue that the opposite is true.
“In 2021, value finally started outperforming growth. However, this has so far done little to reduce the spread in valuations,” notes BNP Paribas. “The inflationary consequences of recent geopolitical developments, which raise the prospect of central banks increasing interest rates significantly, contribute to an outlook that we see as distinctly more favourable to value than growth stocks.”
In its note, BNP Paribas discusses the value spread and premium. Essentially, the value spread is the valuation gap between growth and value stocks, while the value premium is the return above growth stocks that value names can potentially offer. What could augur well for SDOG is that spreads remain wide.
“When it comes to performance, sector-neutral value strategies and multi-factor strategies recorded a strong rebound in 2021 as value spreads peaked. Other factor styles such as quality, momentum and low risk also did well,” adds BNP Paribas.
Sector neutrality is relevant regarding SDOG because the ALPS fund equally weights its sector exposures, which is a marked departure from some cap-weighted rivals that are excessively allocated to a small number of sectors.
Even without outsized exposure to financial services stocks, which is often a hallmark of value ETFs, SDOG also offers investors the benefits of rising rates protection — a trait that’s of obvious near-term value.
“Moreover, what was already a favourable value investing scenario may even be reinforced by the manifest intention among leading central banks to respond to rising inflation by raising official interest rates. Such a scenario is typically unfavourable for growth stocks,” concludes BNP Paribas. “In our view, since value spreads still have a long way to compress, the environment remains particularly favourable for value and multi-factor equity strategies.”
Other high-dividend ETFs include the SPDR S&P Dividend ETF (SDY), the iShares Select Dividend ETF (NYSEArca: DVY), and the iShares Core High Dividend ETF (HDV).
For more news, information, and strategy, visit the ETF Building Blocks Channel.
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.