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Forget Growth, Buy These Value ETFs Instead

Sanghamitra Saha

It seems that finally the outstanding U.S. stock rally that started with Trump’s win has been put to rest. On November 28, small-cap index Russell 2000 – one of the key winners of the Trump rally – fell 1.3%, quelling its ‘longest rally in two decades (read: 6 ETFs to Play Small-Cap Surge for Big Gains).’

The S&P 500 and the Dow Jones Industrial Average which hit all-time highs also stepped back. Even financial stocks – the other beneficiaries of ‘Trumponomics’ and Fed hike bets – retreated with Financial Select Sector SPDR ETF XLF losing about 1.2%. On the other hand, the bond market upheaval – following a steep sell-off with a spike in yields – eased a bit with iShares 20+ Year Treasury Bond TLT advancing over 0.7% on November 28 (read: Is the Treasury Bond ETF Rally About to End?).

Why the Reversal

The market hit all time-highs on hopes of fiscal stimulation in the Trump presidency which seems to have been finally priced in. Notably, Trump has vowed to increase fiscal spending, create a lenient regulatory environment and lower taxes.

BlackRock's Global Allocation Fund now believes that “the Trump rally may be over for now” and that the “U.S. market needs time to digest the recent gain.” The average year-end target for the S&P 500 is 2,209 set by analysts, just at 0.3% premium to the current level.

BlackRock also went on to explain that “one of the dangers for 2017 for U.S. equity investors is that if earnings expectations start to come down, as they usually do, there's some near-term risks.” He also warned that the first year of a U.S. presidential administration normally does not bode well for stocks.

Goldman Sachs also pointed out that it is too early to bet so big on Trump. As per the bank, most of the Trump-induced tailwinds will not materialize before late 2017. Moreover, Goldman cautioned that the current state of U.S. fiscal health "may limit the scope for large deficit-financed tax cuts or spending increases."

At the current level, Goldman sees “$100 billion in tax cuts ($70 billion for individuals and $30 billion for firms), and $50 billion of net spending increase” which would result in a 0.6% rise in real GDP over the next two years. But elevated levels of “federal debt held by the public” may restrain Trump from enacting a hefty fiscal boost.

On the other hand, a high chance of the Fed hiking interest rates next month will likely result in cease in cheap dollar inflows. Plus, the greenback is hovering at multi-year highs which in turn may weigh on U.S. exports. Specially, large-cap stocks with greater exposure to the international arena will suffer from negative currency translation (read: Currency ETF Winners & Losers Post Trump Win).

Why Time for Value Investing?

Though growth stocks and ETFs had a stellar run since election on ‘Trumponomics’ and a pickup in U.S. growth, the momentum will likely fizzle out in the near term. Investors should rather cycle back to mid or small-cap value stocks and ETFs, which tend to be better bets in an uncertain environment. Value funds offer exposure to a wide variety of stocks with value characteristics, such as low P/B, low P/S and low P/E ratios.

Below we highlight a few mid and small-cap ETFs that were upgraded to a Zacks Rank #1 (Strong Buy) or #2 (Buy) recently.

Mid-Cap ETFs

iShares Russell Mid-Cap Value IWS – #3 (Hold) to #1

Vanguard Mid-Cap Value ETF VOE – #3 (Hold) to #1

WisdomTree MidCap Dividend ETF DON – #3 (Hold) to #1

Small-Cap ETFs

iShares Russell 2000 Value ETF IWN – #3 (Hold) to #2

Vanguard Small-Cap Value ETF VBR – #3 (Hold) to #2

iShares Morningstar Small-Cap Value JKL – #3 (Hold) to #2

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ISHARS-20+YTB (TLT): ETF Research Reports
 
SPDR-FINL SELS (XLF): ETF Research Reports
 
ISHARS-MO SC VL (JKL): ETF Research Reports
 
ISHARS-RS M VL (IWS): ETF Research Reports
 
VIPERS-SC VALUE (VBR): ETF Research Reports
 
ISHARS-RS 2K VL (IWN): ETF Research Reports
 
VANGD-MC VALUE (VOE): ETF Research Reports
 
WISDMTR-MC DIV (DON): ETF Research Reports
 
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