After years of underperformance, value investing has been performing well driven by a combination of factors. The market uncertainty led by skyrocketing inflation, Fed’s aggressive rate hikes and Russia’s invasion of Ukraine has made investors jittery, thereby raising the appeal for value investing.
Growth stocks have become too expensive after a 10-year super cycle, compelling investors to dump them as the era of low interest rates ended. The Fed has raised rates by 25 bps for the first time since 2008 and expects to follow a more aggressive path to fight the 40-year high inflation. Higher yields indicate optimism in the economy backed by increased consumer confidence, rising wages and higher spending. This combination of factors will result in increased industrial activity and a pickup in consumer demand, thereby lifting the value stocks.
Additionally, the ongoing Russia-Ukraine war has led to supply disruption fears in an already-tight commodity market, thereby resulting in amplified inflation worries. Further, the U.S. Treasury bond yield curve inverted for the first time in three years, signaling U.S. recession. This means that the yield on the two-year Treasury note was higher than that of the 10-year note. In such a scenario, value investing seems a perfect choice.
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 the inefficiencies in the market and have the potential to deliver higher returns with lower volatility compared with their growth and blend counterparts. Value stocks are less susceptible to trending markets and their dividend payouts offer safety in times of market turbulence.
While there are many options available in the stock world, investors can tap the strength in value in the basket form through ETFs. iShares Core S&P U.S. Value ETF (IUSV - Free Report) , SPDR Portfolio S&P 500 Value ETF (SPYV - Free Report) , Vanguard Mid-Cap Value ETF (VOE - Free Report) , iShares Morningstar Mid-Cap Value ETF (IMCV - Free Report) and Vanguard Russell 1000 Value ETF (VONV - Free Report) look compelling choices.
iShares Core S&P U.S. Value ETF (IUSV - Free Report)
iShares Core S&P U.S. Value ETF offers exposure to large- and mid-cap U.S. equities that exhibit value characteristics by tracking the S&P 900 Value Index. It has AUM of $12.2 billion and charges 4 bps in annual fees. IUSV has a Zacks ETF Rank #1 (Strong Buy).
SPDR Portfolio S&P 500 Value ETF (SPYV - Free Report)
SPDR Portfolio S&P 500 Value ETF tracks the S&P 500 Value Index, charging investors 4 bps in annual fees. It has amassed $14.6 billion in its asset base and sports a Zacks ETF Rank #1.
Vanguard Mid-Cap Value ETF (VOE - Free Report)
Vanguard Mid-Cap Value ETF follows the CRSP US Mid Cap Value Index, which measures the investment return of mid-capitalization value stocks. It has amassed $16.8 billion and charges 7 bps in fees per year. Vanguard Mid-Cap Value ETF has a Zacks ETF Rank #1.
iShares Morningstar Mid-Cap Value ETF (IMCV - Free Report)
iShares Morningstar Mid-Cap Value ETF offers exposure to mid-sized U.S. companies and follows the Morningstar US Mid Cap Broad Value Index. It has amassed $525 million in its asset base and charges 6 bps in annual fees. iShares Morningstar Mid-Cap Value ETF has a Zacks ETF Rank #2.
Vanguard Russell 1000 Value ETF (VONV - Free Report)
Russell 1000 Value ETF targets the large-cap value segment of the broad market by tracking the Russell 1000 Value Index. With AUM of $7.4 billion, it charges 8 bps and has a Zacks ETF Rank #1.