U.S. stocks continue pushing to record highs and with cyclical sectors such as consumer discretionary and technology doing a lot of the heavy lifting, investment factors such as growth and momentum are getting plenty of acclaim while value is getting left behind.
The value factor experienced some rough times during the heyday of the ongoing bull market as growth and momentum factors overshadowed the value style. However, some analysts believe now is an ideal time for investors to consider value stocks.
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.
UBS Wealth Management’s Jeremy Zirin “recently upgraded large-cap value stocks. Both the S&P 500 Value Index and Russell 1000 have been up just two percent so far this year, compared to their broader counterparts, which are up more than seven percent,” reports CNBC.
One of the largest value ETFs is the the Vanguard Value ETF (NYSEArca: VTV). VTV follows the tracks the CRSP US Large Cap Value Index and is one of the most widely followed value ETFs. CRSP includes sales/price and historical earnings/price ratio as well as 12-month forward earnings/price ratio and dividend yield to form its value indexes.
Value investing is a popular long-term investment strategy. 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.
The energy and financial services sectors, frequently the two largest sector allocations in many value ETFs, have been laggards this year, explaining the slack performance of the value factor on a broader level.
“What’s been left behind in this market has largely been energy and financials. Energy and financials make up almost 40 percent of the value index, and we think the risk reward around those two sectors look quite attractive,” Zirin said, according to CNBC.
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.
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