The coronavirus pandemic fueled a risk-off sentiment that should’ve seen a deluge of investors heading out of the growth-oriented equities that fueled the decade-long bull run and into value-oriented equities. However, with the federal government stepping into providing aid to the economy, growth equities may have been an unforeseen beneficiary.
“On March 15, along with cutting the federal funds rate to the lower bound, the Federal Reserve announced that they would begin another asset purchasing program better known as quantitative easing (QE4),” a Direxion Investments “The Spotlight” article noted. “This time around, they planned to purchase $500 billion of Treasuries and $200 billion of Mortgage-Backed Securities until they upped the ante with the move to unlimited QE across a wider range of securities including investment grade corporate ETFs.”
“While this time may prove to be different, previous rounds showed growth outpacing value, and we believe that QE4 will be similar,” the post added. “On average, growth outpaced value by 3.05%. The outperformance of growth during periods of quantitative easing tends to be consistent with yields decreasing across the maturity spectrum and investors seeking out more potential certainty around earnings potential, which growth stocks can provide.”
Relative Play on Value or Growth
Will a mass movement away from growth into more quality, safe investments predicated on value be on the way in a post-coronavirus market? From a relative value ETF standpoint, this could put value over growth equities and defensive over cyclical equities in play—particularly, the Direxion Russell 1000 Value Over Growth ETF (NYSEArca: RWVG)
RWVG seeks investment results that track the Russell 1000® Value/Growth 150/50 Net Spread Index. The fund, under normal circumstances, invests at least 80% of its net assets in securities that comprise the Long Component of the index or shares of ETFs on the Long Component of the index.
The index 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.
On the other hand, Investors looking to play further strength in growth equities can start with the Direxion Russell 1000 Value Over Growth ETF (NYSEArca: RWGV). RWGV measures the performance of a portfolio that has 150% long exposure to the Russell 1000® Growth Index (the “Long Component”) and 50% short exposure to the Russell 1000® Value 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.
For more relative market trends, visit our Relative Value Channel.