The extended bull run saw growth and momentum-focused equities build a large lead on value-oriented equities, but that’s starting to change and more upside could be ahead for value-focused ETFs.
QMA, a quantitative equity and multi-asset manager that is part of Prudential Financial’s investment management business, is expecting cheap equities relative to their value to outperform more expensive equities.
“It looks like we’re going through a bubble every bit as big as the tech bubble was, every bit as big as in the global financial crisis, but it’s happening much more under the radar,” said Andrew Dyson, chairman, and CEO of QMA. “The two other occasions when we’ve had this degree of underperformance, they’ve been followed by a very large correction.”
As such, there are incredible opportunities for investors to jump into equities while the default maneuver in today’s market landscape is heading into safe-haven assets like bonds or precious metals. Investors, however, could be missing out.
“Rather, we view this as the backdrop for incredible investment opportunities,” the firm said in a report reviewed by publication Institutional Investor. “The current market environment is poised to generate some of the best returns in a quarter-century.”
QMA research data found the following:
- Between May 1998 and February 2000, value lost 16.5%.
- Between May 2007 and November 2008, value declined by 21.14%.
- Between January 2017 and August 2019, investors in value stocks experienced a 21.08% decline.
“This may be an unexpected result to investors,” the report stated. “Markets do not feel as frothy as the Tech Bubble, nor as overwhelmed with systemic concerns as in the GFC. However, the relative dislocations today are comparable with both episodes.”
Value ETFs to Consider
Here are three ETFs investors should consider:
- Vanguard Value ETF (NYSEArca: VTV): seeks to track the performance of a benchmark index that measures the investment return of large-capitalization value stocks. The fund employs an indexing investment approach designed to track the performance of the CRSP US Large-Cap Value Index, a broadly diversified index predominantly made up of value stocks of large U.S. companies. The advisor attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index.
- iShares Russell 1000 Value ETF (NYSEArca; IWD): seeks to track the investment results of the Russell 1000® Value Index (the “underlying index”), which measures the performance of large- and mid-capitalization value sectors of the U.S. equity market. The fund generally invests at least 90% of its assets in securities of the underlying index and in depositary receipts representing securities of the underlying index. It may invest the remainder of its assets in certain futures, options and swap contracts, cash and cash equivalents, as well as in securities not included in the underlying index, but which the advisor believes will help the fund track the underlying index.
- iShares S&P 500 Value ETF (NYSEArca: IVE): seeks to track the investment results of the S&P 500 Value IndexTM, which measures the performance of the large-capitalization value sector of the U.S. equity market. The fund generally invests at least 90% of its assets in securities of the underlying index and in depositary receipts representing securities of the underlying index. It may invest the remainder of its assets in certain futures, options and swap contracts, cash and cash equivalents, as well as in securities not included in the underlying index, but which the advisor believes will help the fund track the underlying index.
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