Buying stocks on the cheap relative to their value and then holding them for an extended duration has been the impetus for value investing. With investing icons like Warren Buffett popularizing the strategy, it’s difficult to not consider value investing as part of one’s portfolio, but with the bull market still in its extended phase and investors basking in the sunlight of growth, are they ready to completely bury value?
One can look at the iShares S&P 500 Value ETF (NYSEArca: IVE) to see that the zest for value has not been as appealing as growth. In the past five years, IVE has been lagging the broader market thanks to an environment where low interest rates have been dominant.
That could continue given the central bank’s stance of keeping rates steady while they’re ready with the rate policy shears to implement cuts if the economy warrants them.
“Duration has been bid up as rates are so low,” Inigo Fraser-Jenkins, Bernstein’s head of European quantitative strategy, said in a note. “Thus, the outperformance of value might require higher interest rates, which could be structurally difficult to achieve in the foreseeable future. In this sense one could say that QE could have stopped the mean-reversion process that usually occurs over the economic cycle.”
A Forthcoming Value Resurrection?
That’s not to say value should be completely ignored. While investors have been flocking to safe haven assets during May’s heavy dosage of volatility, there’s an obvious need need for products that capture the upside potential in U.S. equities.
At the same time, however, there’s also a need for strategies that offer downside protection built into the product as we’ve seen with the market oscillations as of late.
One way investors can achieve this is by concentrating on the value factor. During the volatile moments of the market, investors were quick to react to trade war news. It’s the type of noise that muddies the minds of investors and disconnects them from the fundamentals of an asset and thus, it’s value.
Last year, the growth factor had its day in the sun as the extended bull market hit its peak. Now, investors are realizing the downside of also owning these growth-oriented equities.
That isn’t to say, however, that value stocks are completely immune to fluctuations in the market. Just like during the market doldrums to end 2018, investors are typically better off discarding the growth factor and seeking refuge under an umbrella of value as a defensive play.
For investors looking to capitalize on continued emphasis on growth, they can play the Direxion Russell 1000 Growth Over Value ETF (NYSEArca: RWGV). If they feel value could resurrect itself, they could also use the Direxion Russell 1000 Value Over Growth ETF (NYSEArca: RWVG).
However, speaking to the point of growth exercising its strength over value, RWGV measures the performance of a portfolio that has 150% long exposure to the Russell 1000® Value Index (the “Long Component”) and 50% short exposure to the Russell 1000® Growth Index (the “Short Component”). On a monthly basis, the Index will rebalance such that the weight of the Long Component is equal to 150% and the weight of the Short Component is equal to 50% of the Index value. In tracking the Index, the Fund seeks to provide a vehicle for investors looking to efficiently express a value over growth investment view by overweighting exposure to the Long Component and shorting exposure to the Short Component.
For investors looking for continued upside in growth-oriented equities over value-oriented equities, RWGV offers them the ability to benefit not only from growth opportunities potentially performing well, but from their outperformance compared to value.
Conversely, if investors believe that value-oriented equities will outperform growth-oriented equities, RWVG provides a means to not only see value opportunities perform well, but as a way to capitalize on their outperformance compared to growth.
Trade wars is just one facet that could affect value over growth or vice versa. With a U.S.-China trade deal already priced into the markets, the next trigger event investors can look to is rate cuts by the Federal Reserve.
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