The resurgence of the value factor is supportive for dividend stock ETFs such as the ALPS Sector Dividend Dogs ETF (SDOG).

SDOG 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.

Value stocks are closing 2020 in fine form, as highlighted by a fourth-quarter gain of 18.48% for SDOG.

SDOG YTD Performance

“According to global index provider FTSE Russell, long forgotten value stocks have led the recent rise for US large- and small-cap stocks, with a nearly 15% return for the Russell 1000® ValueTM Index and a 32% rise for the Russell 2000® ValueTM Index for the fourth quarter through December 18 US market close,” according to FTSE Russell research.

SDOG Rebounding in the Current Market Environment

As income-minded investors look for ways to bolster returns in a low-rate environment, various exchange traded funds can rise to the challenge.

Exposure to the value factor could be in play following rotation away from high growth that has outperformed this year to cheaper cyclical sectors. Value stocks tend to trade at a lower price relative to their fundamentals (including dividends, earnings, and sales).

“It has been quite a long time since US equity investors found value stocks in their stockings, with a 14-year underperformance record for the value factor,” writes Mark Barnes, head of Americas investment research, FTSE Russell. “Yet Value’s fortune took a turn in November as news of several COVID-19 vaccine breakthroughs ignited hope for a stronger global economic recovery and reflation, driving robust Value outperformance in most markets. And while it remains to be seen whether this resurgence in value stocks is sustainable, fourth quarter US index performance makes a strong case in point for the benefits of style diversification.”

While they generally have solid fundamentals, value stocks may have lost popularity in the market and are considered bargain-priced compared with their competitors. Value fans believe this time may be different for value stocks, pointing to improving investment sentiment measures, abating fears of a recession, rebounding corporate profits, and lessening trade tensions between the U.S. and China. Furthermore, value stocks are now trading at some of their most attractive prices in years, as the growth/value gap is as wide as it’s been in decades.

Other high dividend ETFs include the SPDR S&P Dividend ETF (SDY), iShares Select Dividend ETF (NYSEArca: DVY), and iShares Core High Dividend ETF (HDV).

For more on cornerstone strategies, visit our 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.