As the U.S. economy looks to reopen, investors may be lured to head back into the turbocharged returns of growth equities, which fueled the extended bull run ahead of March’s sell-off. However, it’s difficult to discount value as a single factor investing alternative, especially with a lot of uncertainty still left with regard to the economy.
“Value stocks have gone through a really rough stretch depending on which index you look at. They’ve all pretty much been out of favor for the past 10-plus years, and there are a few factors that are contributing to that,” said Morningstar’s Alex Bryan. “Number one, the valuation spread between value and growth stocks has increased considerably over the past decade. Value stocks are by definition going to trade at lower valuations than growth stocks, but that gap has only become bigger over the past decade, and that’s a big part of why value stocks have underperformed.”
Another factor Bryan mentioned is a heavy reliance on specific sectors like tech.
“The second piece is the sector biases that are inherent in a lot of value strategies,” said Bryan. “Typically value-oriented indexes tend to overweight sectors like energy and financial services, and those have been particularly challenged areas of the market over the past decade, due to the decline in oil prices and the challenging interest-rate environment that we’ve had. They also tend to be underweight stronger-performing sectors like technology and healthcare, so those sector biases have taken a bite out of performance.”
Lastly, investors have to wonder whether growth has reached a ceiling.
“Thirdly, a lot of growth stocks have exceeded the market’s expectations as they’ve carved and deepened their economic moats over the past decade,” Bryan added. “So companies like Amazon and Netflix really, I think, have blown a lot of investors away. Even though a lot of people had high hopes for those companies 10 years ago, they’ve more than delivered on those expectations. So I think it’s a combination of different factors, but anyway you look at it, value stocks have had a rough go of it.”
Will growth sustain itself or will a possible recession bring value back to the forefront in the minds of traders? From a relative value ETF standpoint, this could put value over growth equities and defensive over cyclical equities in play—particularly, the Direxion Russell 1000 Value Over Growth ETF (NYSEArca: RWVG)
RWVG seeks investment results that track the Russell 1000® Value/Growth 150/50 Net Spread Index. The fund, under normal circumstances, invests at least 80% of its net assets in securities that comprise the Long Component of the index or shares of ETFs on the Long Component of the index.
For more relative market trends, visit our Relative Value Channel.