Sometimes, assessing the market landscape isn’t as difficult as it’s made out to be. For example, rising interest rates can benefit value stocks while weighing on growth equities.
The opposite is true when rates decline, and investors are learning these lessons this year as Treasury yields climb and value stocks and the related exchange traded funds outperform while growth languishes. That is to say, it’s a good time to consider a fund such as the WisdomTree U.S. Value Fund (WTV).
Actively managed, WTV focuses on companies that are actively repurchasing their own shares, growing dividends, or both. Many companies focusing on shareholder rewards in either form display value traits, making WTV a relevant consideration in today’s market setting.
“Rising interest rates will be bad for growth stocks because the appeal of such stocks lies in cash flows that will come many years down the road. Because the Fed was expanding its balance sheet all these years, interest rates were held artificially low, flattering the net present value of those distant cash flows. As a new, higher rate regime commences, growth stocks will struggle and value stocks will outperform,” says Jeff Weniger, WisdomTree head of equity strategy.
For novice investors, the simple way of looking at the above statement is that when interest rates are rising, the place to be with equities is with companies that are generating cash flow today, not making investors wait for it.
WTV offers investors another enviable trait relevant to the 2022 landscape. While not all of the ETF’s 145 holdings are dividend-payers, many are, and many are boosting payouts or have the resources to do so. That’s notable not only because dividend growth often reduces portfolio volatility, but it also serves as one of the best avenues for damping inflation. Bottom line — WTV, for which the expense ratio was recently pared to 0.12% from 0.28%, has a lot of the right ingredients to get investors through a trying environment while remaining engaged with equities.
“T-note’s yield shot up from 1.55% to 2.67%, which spooked indexes like the Russell 1000 Growth into a collapse that mirrored that of the NASDAQ. The index hit the 20% loss threshold that marks bear markets a few weeks ago, though the total loss since November 19 currently stands at 14.8%,” concludes Weniger. “That means value has beaten growth by over 1,600 basis points in half a year. And I think there is more to come.”
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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.