The growth factor has been on a torrid pace to start 2017, easily outperforming the value factor. However, investors should be hasty in dismissing exchange traded funds focusing on value stocks.
Investors who believe that value investments may just be the current flavor of the day should keep in mind that value investing is a popular long-term investment strategy. Well-known value ETFs include the iShares S&P 500 Value ETF (NYSEArca:IVE) and the iShares MSCI USA Value Factor ETF (NYSEArca:VLUE).
“Growth indexes — which track the subset of companies that have seen sharp growth in sales and earnings — are largely composed of tech stocks, whose shares have risen considerably over the past year. Value indexes — which track stocks with low prices relative to their earnings, sales and book values — now have outsized holdings of financial and energy stocks,” according to CNBC.
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.
Value stocks have historically outperformed growth stocks, or companies with high earnings expectations, in almost every market over the long-haul. For instance, the MSCI USA Value Index has outperformed the MSCI USA Growth Index by an annualized 81 basis points since 1974 through September 2015.
“David Seaburg, head of equity sales trading at Cowen & Company, agrees that the gap between 2017 value and growth performance could close further. However, he added, this is ‘more because of the positioning in the environment’ as investors look to back away from the crowded growth stocks,” reports CNBC.
Related: Smart Beta ETFs Are Smart Long-Term Investments
With the bull market in U.S. stocks aging, finding sectors that are credible plays is increasingly difficult. Surprisingly, the aforementioned VLUE devotes over 21% of its weight to technology stocks. Financial services and healthcare names combine for 26.7% of that ETF’s weight.
VLUE “seeks to track the performance of an index that measures the performance of U.S. large- and mid-capitalization stocks with value characteristics and relatively lower valuations, before fees and expenses,” according to iShares.
For more on smart beta ETFs, please visit our Smart Beta Channel.