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Value investing has been out of investors’ favor over the past few years, especially after Trump’s victory. But the trend seems to be reversing now as momentum has started to build up in the space thanks to escalating trade tensions and an aging bull market. In fact, the Russell 1000 Value Index has gained 2.45% since Jul 20, outperforming the 0.83% increase in the Russell 1000 Growth Index.
According to Bank of America Merrill Lynch, the Russell 1000 Value Index beat the Russell 1000 Growth Index last month for the first time since March and by the widest margin since September 2017. The value index climbed 3.8% versus 2.9% for the growth index (read: Best & Worst Zones of July & Their ETFs).
The outperformance came mainly from disappointing earnings from some of the high-profile tech companies, including Facebook , Netflix (NFLX - Free Report) and Twitter , that took a toll on the growth stocks. Additionally, rising U.S. debt and deficits combined with escalating trade tensions are weighing on economic growth, raising the appeal for value stocks amid improving fundamentals.
Why Value?
Value stocks have strong fundamentals — earnings, dividends, book value and cash flow — that trade below their intrinsic value and are undervalued by the market. These seek to capitalize on inefficiencies in the market and have the potential to deliver higher returns with lower volatility compared with growth and blend counterparts. Additionally, value stocks are less susceptible to trending markets and their dividend payments serve as safety at times of market turbulence.
Notably, these stocks outperform the growth ones across all asset classes when considered on a long-term investment horizon.
What’s in the Cards?
The solid momentum is likely to continue given that trade worries have flared up once again with China threatening to impose tariff on $60 billion worth of American goods if the United States places more tariffs on Chinese imports. This has discouraged risk-on trade in an already fragile environment (read: 5 ETF Ways to Bet on China's New Tariff Threats).
The move came following the news that Trump is mulling over raising tariffs from a proposed 10% to 25% on $200 billion of Chinese goods. Both countries already implemented tariffs on $34 billion worth of each other’s goods in July. Each side is also expected to implement tariffs on an additional $16 billion in goods.
Additionally, the American economy has been growing at the fastest pace in nearly four years buoyed by an impressive labor market, higher wages, increasing consumer spending and high consumer confidence. In particular, the historic tax overhaul will continue to provide a huge boost to value stocks. This is because it will create an economic surge, boosting job growth in manufacturing and other sectors, increasing inflation and interest rates. It would further lead to higher earnings, increased buyback activities, and fatty dividends, prompting investors to rotate out of growth and into value stocks (read: 5 ETFs to Buy as Q2 GDP Growth Hits 4-Year High of 4.1%).
Moreover, after years of underperformance, value stocks look appealing with the forward price-to-earnings ratio for the Russell 1000 Value Index at about 15.3 times compared with 22.1 times for the Russell 1000 Growth Index.
Given this, it might be prudent to take a closer look at value ETFs that have gained over the past one month and have the potential to continue doing so given that these have a solid Zacks ETF Rank of #2 (Buy).
Vanguard Mega Cap Value ETF (MGV - Free Report) – Up 3.6%
This product follows the CRSP US Mega Cap Value Index, charging 7 bps in annual fees. It has amassed $2.1 billion in AUM and trades in a moderate average daily volume of 69,000 shares.
SPDR Dow Jones Industrial Average ETF (DIA - Free Report) – Up 3%
This is one of the largest and most-popular ETFs in the large-cap space with AUM of more than $22 billion and average daily volume of 5.3 million shares. It tracks the Dow Jones Industrial Average index, charging investors 0.17% in expense ratio (read: 4 Solid Reasons to Buy Mega-Cap ETFs Now).
Schwab U.S. Large-Cap Value ETF (SCHV - Free Report) – Up 3%
This fund follows the Dow Jones U.S. Large Cap Total Stock Market Index and charges an expense ratio of 0.04%. It has AUM of $4.6 billion and trades in volumes of around 313,000 shares a day on average.
This ETF tracks the S&P 500 Pure Value Index and charges 4 bps in annual fees. It has amassed $1.4 billion in its asset base and trades in a solid average daily volume of 559,000 shares.
Schwab Fundamental U.S. Large Company Index ETF (FNDX - Free Report) – Up 2.2%
This fund follows the Russell RAFI US Large Company Index and has amassed $4.6 billion. It trades in an average daily volume of 331,000 shares and charges 25 bps in annual fees.
iShares Edge MSCI Multifactor USA ETF (LRGF - Free Report) – Up 1.8%
With AUM of $1.1 billion, this fund offers exposure to a portfolio of U.S. large- and mid-cap stocks that focus on four proven drivers of return: financially healthy firms, stocks that are inexpensive, smaller companies and trending stocks. This is easily done by tracking the MSCI USA Diversified Multiple-Factor Index, charging 20 bps in annual fees. Volume is good exchanging 220,000 shares in hand a day on average.
Bottom Line
Value ETFs seek to outperform amid market uncertainty. As such, investors should take a closer look at a few of the attractive value products in this segment for excellent exposure and some outperformance in the near term.
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Value ETFs Regain Momentum: Will This Last?
Value investing has been out of investors’ favor over the past few years, especially after Trump’s victory. But the trend seems to be reversing now as momentum has started to build up in the space thanks to escalating trade tensions and an aging bull market. In fact, the Russell 1000 Value Index has gained 2.45% since Jul 20, outperforming the 0.83% increase in the Russell 1000 Growth Index.
According to Bank of America Merrill Lynch, the Russell 1000 Value Index beat the Russell 1000 Growth Index last month for the first time since March and by the widest margin since September 2017. The value index climbed 3.8% versus 2.9% for the growth index (read: Best & Worst Zones of July & Their ETFs).
The outperformance came mainly from disappointing earnings from some of the high-profile tech companies, including Facebook , Netflix (NFLX - Free Report) and Twitter , that took a toll on the growth stocks. Additionally, rising U.S. debt and deficits combined with escalating trade tensions are weighing on economic growth, raising the appeal for value stocks amid improving fundamentals.
Why Value?
Value stocks have strong fundamentals — earnings, dividends, book value and cash flow — that trade below their intrinsic value and are undervalued by the market. These seek to capitalize on inefficiencies in the market and have the potential to deliver higher returns with lower volatility compared with growth and blend counterparts. Additionally, value stocks are less susceptible to trending markets and their dividend payments serve as safety at times of market turbulence.
Notably, these stocks outperform the growth ones across all asset classes when considered on a long-term investment horizon.
What’s in the Cards?
The solid momentum is likely to continue given that trade worries have flared up once again with China threatening to impose tariff on $60 billion worth of American goods if the United States places more tariffs on Chinese imports. This has discouraged risk-on trade in an already fragile environment (read: 5 ETF Ways to Bet on China's New Tariff Threats).
The move came following the news that Trump is mulling over raising tariffs from a proposed 10% to 25% on $200 billion of Chinese goods. Both countries already implemented tariffs on $34 billion worth of each other’s goods in July. Each side is also expected to implement tariffs on an additional $16 billion in goods.
Additionally, the American economy has been growing at the fastest pace in nearly four years buoyed by an impressive labor market, higher wages, increasing consumer spending and high consumer confidence. In particular, the historic tax overhaul will continue to provide a huge boost to value stocks. This is because it will create an economic surge, boosting job growth in manufacturing and other sectors, increasing inflation and interest rates. It would further lead to higher earnings, increased buyback activities, and fatty dividends, prompting investors to rotate out of growth and into value stocks (read: 5 ETFs to Buy as Q2 GDP Growth Hits 4-Year High of 4.1%).
Moreover, after years of underperformance, value stocks look appealing with the forward price-to-earnings ratio for the Russell 1000 Value Index at about 15.3 times compared with 22.1 times for the Russell 1000 Growth Index.
Given this, it might be prudent to take a closer look at value ETFs that have gained over the past one month and have the potential to continue doing so given that these have a solid Zacks ETF Rank of #2 (Buy).
Vanguard Mega Cap Value ETF (MGV - Free Report) – Up 3.6%
This product follows the CRSP US Mega Cap Value Index, charging 7 bps in annual fees. It has amassed $2.1 billion in AUM and trades in a moderate average daily volume of 69,000 shares.
SPDR Dow Jones Industrial Average ETF (DIA - Free Report) – Up 3%
This is one of the largest and most-popular ETFs in the large-cap space with AUM of more than $22 billion and average daily volume of 5.3 million shares. It tracks the Dow Jones Industrial Average index, charging investors 0.17% in expense ratio (read: 4 Solid Reasons to Buy Mega-Cap ETFs Now).
Schwab U.S. Large-Cap Value ETF (SCHV - Free Report) – Up 3%
This fund follows the Dow Jones U.S. Large Cap Total Stock Market Index and charges an expense ratio of 0.04%. It has AUM of $4.6 billion and trades in volumes of around 313,000 shares a day on average.
SPDR S&P 500 Value ETF (SPYV - Free Report) – Up 2.3%
This ETF tracks the S&P 500 Pure Value Index and charges 4 bps in annual fees. It has amassed $1.4 billion in its asset base and trades in a solid average daily volume of 559,000 shares.
Schwab Fundamental U.S. Large Company Index ETF (FNDX - Free Report) – Up 2.2%
This fund follows the Russell RAFI US Large Company Index and has amassed $4.6 billion. It trades in an average daily volume of 331,000 shares and charges 25 bps in annual fees.
iShares Edge MSCI Multifactor USA ETF (LRGF - Free Report) – Up 1.8%
With AUM of $1.1 billion, this fund offers exposure to a portfolio of U.S. large- and mid-cap stocks that focus on four proven drivers of return: financially healthy firms, stocks that are inexpensive, smaller companies and trending stocks. This is easily done by tracking the MSCI USA Diversified Multiple-Factor Index, charging 20 bps in annual fees. Volume is good exchanging 220,000 shares in hand a day on average.
Bottom Line
Value ETFs seek to outperform amid market uncertainty. As such, investors should take a closer look at a few of the attractive value products in this segment for excellent exposure and some outperformance in the near term.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>