Many continued to chase after growth and momentum this year as the bull market extends, despite the recent bout of volatility. However, it may be time for investors to look back into the value style and category-related exchange traded funds.
Thomas Moore, investment director at Aberdeen Standard Investments, pointed out that the premium paid for companies with growth potential is higher that it has been at any time since the dotcom bubble peaked in 2000, CNBC reports.
“Investors have lost sight of valuations in the last few months,” Moore told CNBC, adding that “conditions are there for a rotation in the second half of the year.”
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.
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Trusting Stocks & Sectors
Looking ahead, Moore argued that the ongoing growth in the economy along with solid earnings figures would encourage investors to trust stocks and sectors that have previously been overlooked.
“People who are in their twenties will be thinking that old economy stocks are losers. But there will come a time for them. Amazon won’t be disrupting every sector. They won’t be building roads, they won’t be constructing homes,” Moore added.
Moore said it was only time “before this crowded long (position) unwinds.”
Investors who are interested in rotating out of the growth style and into the value theme have a number of options to choose from. Plain vanilla index ETFs that track the value theme have underperformed so far this year. The iShares Russell 1000 Value ETF (NYSEArca: IWD), which tracks value stocks taken from the large-cap Russell 1000 Index, rose 1.6% year-to-date. The Vanguard Value ETF (NYSEArca: VTV), which tracks the CRSP US Large Cap Value Index, increased 3.2%. The Invesco S&P 500 Pure Value ETF (NYSEArca: RPV), which tracks value stocks taken from the S&P 500 index, gained 2.9%. In contrast, the benchmark S&P 500 advanced 6.9% so far this year.
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