Valuations on growth stocks are rising as investors pile into that trade while value stocks and exchange traded funds (ETFs) are getting progressively cheaper.
“As of Friday, the MSCI World Value Index was flirting with a 19-year low against its growth counterpart at less than half a basis point from its dot-com nadir,” reports Bloomberg.
Unique ETFs, namely the Direxion Russell 1000 Growth Over Value ETF (NYSEArca: RWGV) and the Direxion Russell 1000 Value Over Growth ETF (NYSEArca: RWVG), allow investors to tap the chasm between growth and value stocks.
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.
Value In Search Of Vindication
Value stocks usually trade at lower prices relative to fundamental measures of value, like earnings and the book value of assets. On the other hand, growth-oriented stocks tend to run at higher valuations since investors expect the rapid growth in those company measures, but more are growing wary of high valuations. The factor has been a laggard over the course of much of this bull market, prompting speculation as to when value stocks will again be in style.
During periods of accelerating growth, asset categories including value, small-cap and cyclical stocks that exhibit high levels of business leverage and needed access to credit tend to outperform. On the other hand, when we are in a slow down or a contraction, the growth, large-cap and defensive categories outperformed as they provide more diversified businesses and showed lower fixed costs to help them weather economic storms.
“Fears for the economic outlook prompted a dovish pivot by the world’s major central banks in the first quarter,” according to Bloomberg. “Easier monetary policies punish value stocks because the group includes beaten-up industries like banks, which are more sensitive to rates, while a weaker economy makes it less likely cyclical shares like industrials will catch up. The same environment makes firms that can post reliable profits throughout the business cycle even more attractive.”
RWVG has 150% long position in value stocks and a 50% short position in growth stocks, bringing its net exposure to 100%. Individual short holdings in the fund include Apple Inc. (NASDAQ: AAPL) and Microsoft Corp. (NASDAQ: MSFT) while financial services and healthcare stocks represent almost half the fund’s long positions.
For more relative market trends, visit our Relative Value 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.