Try as it might, and it’s certainly trying, the value factor just can’t seem to make significant inroads against its growth rival. For example, the SPDR Portfolio S&P 500 Growth ETF (NYSEArca: SPYG) is higher by almost 14% year-to-date while the S&P 500 Value Index is lower by more than 11%.
SPYG, which tracks the S&P 500 Growth Index, and rival growth ETFs can actually perform well late in the business cycle. Investors can still enhance their portfolios as the bull market extends with growth-oriented stocks that continue to perform despite the recent bouts of volatility. The growth style has outperformed the market in spite of being prone to sell-offs with strong corporate earnings.
“That lack of sustainability has left investors with a specific value bias lagging, as growth stocks have pushed broad equity measures –like the tech-heavy NASDAQ – to record highs, even with the COVID-19 pandemic weighing on the economy and society,” said Matthew Bartolini, head of SPDR Americas research, in a recent note. “The growth-over-value trade has been widespread as well, leading investors to ponder whether value stocks will return to favor.”
Going With Growth
Growth stocks are often associated with high-quality, prosperous companies whose earnings are expected to continue increasing at an above-average rate relative to the market. Growth stocks generally have high price-to-earnings (P/E) ratios and high price-to-book ratios. Still, data suggest the growth/value premium isn’t overly elevated relative to historical norms.
Interestingly, value is lagging growth by wide margins across market capitalization segments and in ex-US markets, both developed and emerging.
“Value has underperformed for the year to date, as well as both before and after the March 23 market low, when measured by US market cap segments (both traditional cap-weighted and pure factor drive), and when compared to international stocks,” writes Bartolini.
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.
“For the rest of 2020, there will be fits and starts but growth styles are highly likely to continue their run, as broad economic and fundamental growth is still going to be challenged throughout the year as community re-openings have their own fits and starts,” notes Bartolini. “And in an environment devoid of growth, investors are likely to seek it out and not be too concerned about paying a premium.”
For more on multi-factor strategies, visit our Multi-Factor 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.