When Can Investors Know Value is Ready to Take Over?

The rotation from growth to value has been in the making for some time as cautious investors preplanned the move as the extended bull rally could run out of steam soon. While it’s difficult to time markets, past studies have shown that certain market landscapes can hint at a rotation to value.

“Chris Watling of London’s Longview Economics shows that value goes through long cycles of two decades or more,” wrote John Authers in Bloomberg. “It rose after the collapse of the ‘Nifty Fifty’ growth stocks at the beginning of the 1970s, to reach a peak in 1988, gradually fell during the dot-com era to a low in February 2000, and then enjoyed another upward cycle that peaked in March 2007. Its underperformance since then has been severe but, as he points out, not as bad as the troughs of 1975 and 2000.“

When can investors know the time is right to rotate into value?

“Again, Watling suggests that it moves in line with cycles in the economy. New transformative technologies start off, and move through an innovation phase and into expansion and then maturity. Value does well when technologies have picked up and begun to proliferate through the economy. Thus the dot-com boom gave way to a period when many companies improved profits by harnessing the internet. This implies value takes over at the end of a cycle. Watling also suggests that value needs to be compellingly valued at an index level, and valuations of single growth stocks need to be extreme (thus signaling the end of a growth phase).

Where to Look for Value

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.

Investors can also look to the iShares Edge MSCI USA Value Factor ETF (BATS: VLUE). VLUE seeks to track the investment results of the MSCI USA Enhanced Value Index 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.

Finally, another option that tilts towards value is the WisdomTree U.S. LargeCap Dividend Fund (NYSEArca: DLN). DLN seeks to track the price and yield performance, before fees and expenses, of the WisdomTree U.S. LargeCap Dividend Index, which is a fundamentally weighted index that is comprised of the large-capitalization segment of the U.S. dividend-paying market.

For more market trends, visit ETF Trends.