As has been widely documented, the value factor and the corresponding exchange traded funds continue trailing more growth-oriented factor strategies, but there are signs the tide is starting to turn in favor of value.
Over the past 90 days, a volatile period for U.S. stocks, the SPDR Portfolio S&P 500 Value ETF (NYSEArca: SPYV) has been 70 basis points less bad than the S&P 500. SPYV, which tracks the S&P 500 Value Index, has also been significantly less volatile than the broader market over that period.
SPYV’s underlying index “contains stocks that exhibit the strongest value characteristics based on: book value to price ratio; earnings to price ratio; and sales to price ratio,” according to State Street.
Value has been lagging for much of this current bull market and that is the case again this year, but some market observers believe the strategy could bounce back in 2019.
“If nothing changes, 2018 would mark the sixth year of underperformance in the last decade,” said State Street in a recent note. “This is notably different than value’s excess return to the market historically, which has essentially been a coin flip with value underperforming only 49% of the time over the last 39 calendar years.”
Call It A Comeback
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 yield curve is another issue to consider when assessing value’s merits in the current environment.