ETF Investors Reassess the Value of Value

Growth stocks have been a major contributor to the recent U.S. equity rally, but investors’ shifting sentiments reveal greater attention being focused on value and related ETFs.

“We also like the value factor, home to the cheapest companies across U.S. sectors,” according to a BlackRock research note. “The value factor seeks these underpriced securities and has historically delivered higher risk-adjusted returns than the broad market over the long run. Changing investor sentiment could support a value-driven rally. Moreover, increased benchmark interest rates as the Federal Reserve (Fed) continues its rate hikes could provide an additional tailwind. Indeed, it is important to note that in periods of rising interest rates and benchmark bond rates, value has tended to outperform.”

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, especially as the U.S. equities market moves toward the ninth year of an extended bull run.

According to Morningstar data, value stocks have underperformed the growth style for the better part of the past decade. Over the past 10 years, investors punished lower-valuation stocks and rewarded the higher-quality and momentum stocks, with growth and momentum both leading the charge in the current year.

Given the extended underperformance of the value style and potentially overdone rally in growth stocks, investors have looked back into value-oriented strategies this year, exhibiting a preference for low-cost index funds. Year-to-date, U.S. large-cap value ETFs have attracted $13 billion in net inflows, and the trend shows no signs of abating.