Value Factor Rotation Could be Legitimate

The value factor is shaking out of its doldrums and some market observers believe a credible growth-to-value rotation is underway. That could boost the fortunes of an array of previously lagging value-oriented ETFs.

The iShares MSCI USA Value Factor ETF (CBOE: VLUE) is a popular avenue for accessing value stocks while the Vanguard Value ETF (NYSEArca: VTV) is one of the largest smart beta ETFs of any stripe. In fact, several of the largest smart beta ETFs are value funds.

VTV follows the tracks the CRSP US Large Cap Value Index and is one of the most widely followed value ETFs. CRSP includes sales/price and historical earnings/price ratio as well as 12-month forward earnings/price ratio and dividend yield to form its value indexes.

Year-to-date, the iShares Russell 1000 Growth ETF (NYSEArca: IWF) jumped 28.2% and iShares Russell 1000 Value ETF (NYSEArca: IWD) increased 11.5% while the blended iShares Russell 1000 ETF (NYSEArca: IWB) rose 19.7%.

However, over the past month, the value style is speeding up, with IWD up 2.5%, compared to IWF’s 1.7% rise and IWB’s 2.1% gain.

“Michael Bapis, partner and managing director of The Bapis Group at HighTower Advisors, said recently on CNBC’s “Trading Nation” that value stocks will begin falling back into favor,” reports CNBC. “Earnings are going to matter more going forward than they ever have, and their fundamental backdrops will become more important than the story of stocks’ future valuation.”

The recent rotation out of technology stocks into value sectors, including financial services, is also seen as a catalyst for value funds.