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4 Reasons Why Value ETFs Continue to Outperform

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Wall Street has been enjoying a strong rally this year on expectation of a strong economic recovery. While the gains were broad based, value investing is dominating this year’s ascent. This is especially true as iShares Russell 1000 Value ETF (IWD - Free Report) , which targets the value segment, has risen 13.1% so far this year compared with a gain of 4.6% for its growth counterpart iShares Russell 1000 Growth ETF (IWF - Free Report) .

Per Nasdaq article, the Russell 1000 Value Index outperformed the Russell 1000 Growth Index by 9.9 percentage points in the first quarter, marking its largest outperformance in 20 years. The outperformance is likely to continue at least in the short term (read: Best Performing ETFs of Q1 2021).

We highlight several reasons for outperformance of value investing, which refers to those stocks that trade below their intrinsic value:

Rapid Vaccinations

The biggest vaccination rollout in history is underway with more than 704 million doses administered across 153 countries, according to data collected by Bloomberg. In the United States, more Americans have received at least one dose than those who have tested positive for the virus since the pandemic began. So far, 171 million doses have been given. The country reached a milestone in its vaccination efforts with new data showing that about 25% of adults in the country have been fully vaccinated as of Apr 7. The Centers for Disease Control and Prevention data revealed that 40% of adults and 75% of seniors have received at least one dose.

The United States is on course to produce hundreds of millions of vaccine doses by summer. With enough supply of vaccines, President Joe Biden recently doubled the country’s coronavirus vaccination target to 200 million shots in his first 100 days in office. Biden also announced that all adults across America would be eligible for COVID-19 vaccines by Apr 19, two weeks ahead of the previous deadline.

Stimulus

The government has injected trillions of dollars into the financial market and the economy, which will act as a catalyst for value strategies as consumer spending will increase as a result of the growth in the money supply. President Joe Biden’s new $2 trillion spending plan to improve transportation, communication and power infrastructure further brightened the outlook. Meanwhile, the Fed’s accommodative policy is boosting the spending power, making value investing appealing. Notably, the central bank has pledged to keep interest rates near zero through 2023 (read: 3 ETFs to Invest in Cheapest Value Stocks).

Faster Economic Recovery

The bouts of latest data point to faster economic recovery. A measure of U.S. manufacturing activity soared to its highest level in more than 37 years in March, driven by strong growth in new orders. Hiring also surged to a seven-month high last month while unemployment dropped to a pandemic low of 6% (read: U.S. Manufacturing Best Since 1983: ETFs to Win).

Americans are growing more confident about the economy given that the University of Michigan’s final sentiment index climbed to a pandemic high of 84.9 in late March from a preliminary reading of 83. The Conference Board on consumer confidence index also jumped to 109.7 in March — the highest level since the onset of the pandemic in March 2020. The combination of factors will result in increased industrial activity and pickup in consumer demand, thereby lifting value stocks.

Other Factors

Value investing seems more tempting given the improvement in corporate earnings growth, expectation for quicker inflation and rising bond yields. The overall earnings picture continues to improve — a trend that will accelerate moving toward the summer months as signs of a sharp economic rebound emerge. Total Q1 2021 earnings are expected to be up 20.6% from the year-ago level on 5.6% higher revenues with a combination of easy comparisons and strong gains in a number of sectors, per the Earnings Trends.

Top ETFs to Consider

In view of the reasons discussed above, we strongly believe that investors should consider value ETFs. We have highlighted five ETFs that have been surging this year and have a solid Zacks ETF Rank #2 (Buy), suggesting their continued outperformance. Additionally, these ETFs provide broad exposure to different sectors:

Invesco S&P 500 Enhanced Value ETF (SPVU - Free Report) – Up 20.9%

This fund follows the S&P 500 Enhanced Value Index, holding 98 stocks in its basket. It has accumulated $120.1 million in AUM while trades in a light average daily volume of 27,000 shares. The product charges 13 bps in annual fees.

iShares S&P Mid-Cap 400 Value ETF (IJJ - Free Report) – Up 20.4%

This product follows the S&P MidCap 400 Value Index, charging investors 18 bps in annual fees. With AUM of $8.3 billion, it holds a basket of 307 stocks and trades in an average daily volume of 595,000 shares (read: 5 Top-Ranked Mid-Cap ETFs for Outperformance).

Vanguard S&P Mid-Cap 400 Value ETF (IVOV - Free Report) – Up 20.3%

This fund tracks the S&P MidCap 400 Value Index and holds a well-diversified basket of 307 stocks. It has amassed $719.2 million and charges 15 bps in annual fees. The ETF trades in average volume of 33,000 shares per day.

SPDR S&P 400 Mid Cap Value ETF (MDYV - Free Report) – Up 20.2%

With AUM of $1.5 billion, this ETF offers pure exposure to the mid-cap value segment of the U.S. equity market by tracking the S&P Mid Cap 400 Value Index. It holds 307 securities in its basket and charges 15 bps in annual fees. Volume is good as it exchanges 436,000 shares in hand per day on average.

iShares Russell Mid-Cap Value ETF (IWS - Free Report) – Up 15%

This product follows the Russell MidCap Value Index. With AUM of $13.4 billion, it holds a basket of 707 stocks and charges investors 24 bps in annual fees. The ETF trades in volume of 728,000 shares a day on average.

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