Value ETFs Are Outperforming | ETF Trends

Exchange traded funds that track the value style are back in vogue, at least for now.

Over the past three months, the iShares S&P 500 Value ETF (NYSEArca: IVE) rose 1.8%, compared to the 4.9% pullback for the iShares S&P 500 Growth ETF (NYSEArca: IVW) and the 1.7% fall-off in the broader iShares Core S&P 500 ETF (NYSEArca: IVV).

Value has also taken a smaller hit in the recent selling. Over the past month, IVE fell 1.7%, compared to the 8.4% decline for IVW and the 5.3% drop for IVV.

Up to last Thursday, large-cap value stocks outperformed the more expensive growth stocks by the widest disparity of any 50-day period since the technology bubble burst in 2000 and 2001, the Wall Street Journal reports.

However, some point to the Treasury yield movements as an indicator of where the value style could be heading.

When yields rose since early December and expectations grew that the Federal Reserve would hike rates aggressively to fight inflation, growth stocks plunged, dragging the Nasdaq index to within sight of another bear market. Cliff Asness, founder of quantitative fund manager AQR, argued that it is plausible that this jump in bond yields was the shock needed for investors to change their views on growth stocks.

“It’s a catalyst not because of solid economic reasons but because catalysts for when irrationality will blow up are behavioral magic, not economics,” Asness told the WSJ.

It is the discount rate that provides one possible explanation for why growth stocks plunged as bond yields rose. The valuations of highly profitable companies are high because they are projected to maintain their high earnings rate. Additionally, the future earnings are worth more today when the discount rate, based on bond yields, is lower. However, as discount rates rise, those future earnings are less attractive.

On the other hand, since value stocks have the lowest duration or cheapest value now, conditions are more attractive for the value style.

However, there is more to value than its performance relative to bond yield movements, since economic strength has a big effect on value stocks. Moreover, if investors are trading based on bond yield moves, there is danger of drastic changes with Federal Reserve policy changes, geopolitical risks, or supply problems that could depress bond yields again.

For more news, information, and strategy, visit ETF Trends.