Investors who are looking for a value play for today’s market environment can consider the Dogs of the Dow investment strategy as well as a targeted exchange traded fund strategy to help put it into practice.
In the recent webcast, Dogs of the Dow: Why 2022 is the Right Time for Value, Andy Hicks, senior vice president, director of ETF portfolio management and research, SS&C ALPS Advisors, argues that the technical setup for the value style looks attractive, especially given value stocks’ historical relative underperformance to growth. Investors are also taking a shine to the value style after years of shunning the play, with stronger cumulative flows into growth ETFs beginning to reverse and increasing flows to value.
Looking ahead, Hicks also notes that large-cap value is projected to grow faster than growth in 2022 based on expected earnings-per-share growth ahead. Specifically, the projected earnings-per-share of growth stocks is estimated to be 6.1% in 2022, and 10.7% for value stocks.
As investors look to shift into value, Paul Baiocchi, chief ETF strategist, SS&C ALPS Advisors, highlighted the ALPS Sector Dividend Dogs ETF (SDOG). SDOG is built on the general belief and approach that stocks that underperformed the previous year but were supported by a positive dividend yield will turn around and outperform the following year. Utilizing this strategy can target many value companies and companies with solid yields.
The strategy is based on the Dogs of the Dow theory. In the 1990s, a reversion-to-the-mean investment strategy gained traction. It focused solely on the highest dividend-yielding stocks in the Dow Jones Industrials Average, where investors would invest annually in just the DJIA stocks with the highest yields.
SDOG puts this Dogs of the Dow theory into practice with a high-conviction tilt toward income and a focus on the value factor, which could be in play following rotation away from high growth that has outperformed cheaper cyclical sectors.
Value fans have argued that this time may be different for value stocks, pointing to improving measures of investment sentiment, lower fears of a slowdown, rebounding corporate profits, and rising rates that put pressure on growth stocks. Furthermore, value stocks are now trading at some of their most attractive prices in years due to the wide growth-value gap after years of growth outperformance.
Meanwhile, cyclical sectors stand to benefit as the economy returns to normal, especially the financials, energy, and industrials sectors. On the other hand, growth stocks, especially technology companies, are more exposed to the Federal Reserve’s rising interest rates outlook.
The ALPS Sector Dividend Dogs ETF tries to reflect the performance of the S-Network Sector Dividend Dogs Index, which applies the Dogs of the Dow theory on a sector-by-sector basis using the S&P 500 with a focus on high dividend exposure.
SDOG’s equal-weight methodology is important because it reduces sector-level risk and dependence of some groups that are considered to be imperiled value ideas. It is a yield-based strategy and equally weights sectors, but that doesn’t diminish its allure as an avenue to rebounding cyclical and economically sensitive groups. The strategy takes a simple one-step screening process to identify the five highest-yielding securities (based on regular cash dividends) in 10 of the 11 Global Industry Classification Standard (GICS) sectors (excluding the real estate sector) as of the last trading day of November.
Financial advisors who are interested in learning more about the Dow investment theory can watch the webcast here on demand.
