With the repudiation of the momentum trade, value stocks and exchange traded funds are attracting more attention.
“It is not surprising that sentiment is shifting away from some of the growth segments of the market,” writes Russ Koesterich, Managing Director, BlackRock Global Chief Investment Strategist. “Valuations for these industries are starting to appear stretched (particularly for biotech and social media companies), and investors are starting to seek better opportunities elsewhere—specifically in some of the more value-oriented areas.”
Specifically, Koesterich suggests U.S. mega-cap companies and non-internet technology industries.
Investors can find a number of mega-cap ETFs, along with funds that specifically target value stocks. For instance, the iShares Russell Top 200 Value ETF (IWX) tracks companies with relatively low price-to-book ratios and lower forecasted growth from the Russell Top 200 Index, which includes the largest capitalization sector of U.S. equities. Additionally, the Vanguard Mega Cap Value ETF (MGV) follows the CRSP US Mega Cap Value Index, which also tracks mega-capitalization stocks with a value tilt.
Looking at valuations, IWX has a 14.4 price-to-earnings ratio, and MGV has a 14.1 P/E ratio, according to Morningstar data. In comparison, the S&P 500 Index shows a P/E of 16.6.
Additionally, the strategist points to international markets, like Europe and Japan, that can offer better value than U.S. stocks.
For broad European market exposure, investors can take a look at the Vanguard FTSE Europe ETF (VGK) , SPDR EURO STOXX 50 Fund (FEZ) and iShares MSCI EMU ETF (EZU) . VGK trades at 15 times the expected earnings of its components, while FEZ and EZU have an average P/E of just under 15. [Europe ETFs Pause, but Upside Remains]
Japanese stocks also trade at valuations below those of their U.S. counterparts. The iShares MSCI Japan ETF (EWJ) , WisdomTree Japan Hedged Equity Fund (DXJ) and db X-trackers MSCI Japan Hedged Equity Fund (DBJP) trade with average P/E ratio of around 13. [Japan ETFs Attract Value Investors]
Lastly, Koesterich points out that value investors are finally turning to the downtrodden emerging markets, and he expects the area to offer “compelling long-term value.”
Broad emerging market ETFs like the Vanguard FTSE Emerging Markets ETF (VWO) and iShares MSCI Emerging Markets ETF (EEM) . Holdings in those ETFs are still viewed as inexpensive even though the two ETFs are both up at least 6% in the past month.
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Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
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