Some markets believe ballot box success by the Democrats in a few weeks could give rise to a resurgence by cyclical value stocks. That scenario could benefit exchange traded funds with value tilts, including the FlexShares Morningstar U.S. Market Factor Tilt Index Fund (NYSEArca: TILT).
TILT is a compelling way for investors to revisit value stocks because it’s not a dedicated value ETF. Rather, the FlexShares fund allocates just over 40% of its weight to value stocks.
TILT tries to provides enhanced exposure to U.S. equities by tilting the portfolio toward long-term growth potential of small-cap and value stocks.
“The potential for a Democratic sweep in November and a Covid vaccine means it is time for investors to shift from tech stocks to cyclical plays, Goldman Sachs said in a note Thursday,” reports Jesse Pound for CNBC. “The move, a global call from Goldman Chief Global Equity Strategist Peter Oppenheimer, is based on a pattern of short-term reversals into cyclical stocks that has occurred since the financial crisis more than a decade ago.”
Tilting Towards Value?
Data confirm TILT could be a better way for investors to revisit value stocks. Over the past three years, the FlexShares ETF is beating the S&P 500 Value Index by more than 1,100 basis points.
Value fans believe this time may be different for value stocks, pointing to improving measures of investment sentiment, 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.
“The two most important contributors to a reversal would be a rise in inflation expectations/bond yields and a rise in growth. The two typically move together,” according to Goldman Sachs.
Growth stocks may be seen as exorbitant and overvalued, causing some investors to favor value stocks, which are considered undervalued by the market. Value stocks tend to trade at a lower price relative to their fundamentals (including dividends, earnings, and sales). While they generally have solid fundamentals, value stocks may have lost popularity in the market and are considered bargain priced compared with their competitors.
TILT allocates more than a quarter of its weight to growth stocks, augmenting some of the laggard status of the value factor.
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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.