As investors look for areas of opportunity, a value-focused ETF is attracting more attention.
Specifically, the iShares Edge MSCI USA Value Factor ETF (BATS: VLUE) was among the most popular ETF plays over the past week, bringing in $718 million in net inflows according to ETFdb data.
“We are now witnessing an extreme confluence of various technical factors that are set to drive a significant upswing in traditional value stocks,” Jefferies strategist Desh Peramunetilleke said in a recent note, Barron’s reports. “Macro, earnings revisions, valuations, and mean-reversion are all supportive of a sharp rebound in value stocks.”
The iShares Edge MSCI USA Value Factor ETF tries to reflect the performance of the MSCI USA Enhanced Value Index, which is composed of U.S. large- and mid-capitalization stocks with value characteristics and relatively lower valuations.
VLUE generally will invest at least 90% of its assets in the component securities of the underlying index and may invest up to 10% of its assets in certain futures, options and swap contracts, cash and cash equivalents. The index is based on a traditional market capitalization-weighted parent index, the MSCI USA Index (the “parent index”), which includes U.S. large- and mid-capitalization stocks.
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. VLUE currently trades at a 12.5 price-to-earnings and a 1.2 price-to-book. In comparison, the S&P 500 shows a 21.1 P/E ratio and a 3.0 P/B.
Value investing is a popular long-term investment strategy. Value stocks have historically outperformed growth stocks, or companies with high earnings expectations, in almost every market over the long-haul, but that trend reversed in a big way during the 2010s decade.
The value style has also lagged behind the broader market for much of the rally in stocks after the coronavirus pandemic-induced selling earlier this year. As cheaper stocks grew cheaper and expensive stocks became more costly, the valuation gap between the two groups has widened. The difference has now widened to the extreme, similar to disparity seen before the tech bubble burst and the onset of the financial crisis.
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