In a time when market experts are forecasting less upside for stocks in 2020, it makes sense for investors to consider adding the value factor to their portfolios via ETF exposure. It can be a difficult pill to swallow given 2019’s record run that saw major indexes reach highs following a late-year rally fueled by U.S.-China trade deal euphoria.
“The outperformance of growth over value stocks is natural in times when investors become exuberant. Modern-day market participants claim superior insight into this Fed-controlled, growth-friendly environment,” Michael Lebowitz wrote in See It Market. “Based on the media, it appears as if the business cycle is dead, and recessions are an archaic thing of the past. Growth stocks promising terrific streams of cash flow at some point in the future rule the day. This naturally leads to investors becoming too optimistic and extrapolate strong growth far into the future.”
It’s easy to make money in a climbing market, but investors need to keep their egos in check especially when the eventual downturn strikes. In those instances, value can become an investor’s insurance policy to help stifle the impact of downswing.
Value also has the track record behind it and over time, can provide better returns as opposed to their growth counterparts. Growth is akin to a one-punch knockout artist in boxing versus growth where it defensively maneuvers to a 12-round decision win—not as exciting in the case of the latter, but it works.
“Meanwhile, value companies tend to retain an advantage by offering higher market yields than growth stocks,” Lebowitz added. “That edge may only be 1 or 2% but compounded over time, it is significant. The problem is that when valuations on the broad market become elevated, as they are now, that premium compresses and diminishes the income effect. The problem is temporary, however, assuming valuations eventually mean-revert.”
Value Options in Today’s Market
One ETF option is the Deep Value ETF (NYSE: DVP), which seeks to track the price and total return performance of the Deep Value Index. The index is composed of the common stock of typically 20 companies included in the S&P 500 that have been selected through a proprietary ranking system developed by the fund’s index provider, that evaluates the earnings and cash flows of each company to create a final universe of companies that are deeply undervalued as compared to the S&P 500 overall.
Another option is the Vanguard Value Index Fund ETF Shares (NYSEArca: VTV). VTV seeks to track the performance of a benchmark index that measures the investment return of large-capitalization value stocks.
For more market trends, visit ETF Trends.