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.
“High-flying technology names like Facebook, Amazon and Netflix have posted earnings that do not necessarily match their valuation, Bapis said, and their shares have been purchased more so on the prospect of future growth,” 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.
“The equities themselves will likely continue performing, he said, though the growth will become difficult to sustain. Bapis said he would begin rotating out of those names, at least a portion of an investor’s original investment,” reports CNBC.
While cap-weighted ETFs are popular ways of playing this theme, there are some compelling smart beta avenues for accessing ex-US developed markets.
That includes the Deutsche X-trackers FTSE Developed ex US Comprehensive Factor ETF (NYSEArca: DEEF). DEEF can be used as a complement or alternative to traditional MSCI EAFE strategies. In either case, the Deutsche ETF is rewarding investors this year. After recently making a series of new highs, DEEF is higher by about 23% year-to-date, outpacing the MSCI EAFE Index by more than 250 basis points since the start of 2017.
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