Is Rotating Out of Growth and into Value Really the Best Option?
This article was originally published on ETFTrends.com.
As volatility continues to rain down on U.S. equities, are investors really better off discarding the growth factor and seeking refuge under an umbrella of value? There are separate camps of analysts who say value is in vogue while others say the growth party isn't over just yet.
Needless to say, October hasn't been kind to U.S. stocks as the technology sector, in particular, has been getting trounced with the S&P 500 following the Nasdaq Composite into correction territory last week before pulling itself out in Tuesday morning's trading session. Still, the flight to value has been readily apparent--take the iShares Russell 1000 Value ETF (IWD) , which saw an influx of investor capital worth $423 million last week, making it the second largest weekly inflow in 2018 and the most since July.
“October has provided plenty of drama this year,” said John Stoltzfus, the chief investment strategist at Oppenheimer & Co. “It could prove to be the best buying opportunity investors have had in some time.”
These deep discounts present opportunities in value plays that have been decimated this year, as highlighted by value-oriented hedge funds like David Einhorn's Greenlight Capital, which was down 25% at the beginning of last month. That soon changed in what's being deemed as a "Red October" where through last Friday’s trading session, the Dow was down 6.7%, while the S&P 500 and Nasdaq were down 8.8% and 10.9, respectively.
“When momentum starts to flatten out or not continue in its existing incline, value starts making more sense because you can still get the growth by purchasing or investing in equities that basically are on sale,” said Kevin Miller, chief executive officer of Minnesota-based E-Valuator Funds. “That’s why at this point in time value will be a preferred spot to be.”
However, If stocks, particularly those within the technology sector, are to come back, it will need some help from the heaviest of hitters--the FANG (Facebook, Amazon, Netflix, Google) stocks, which have been languishing for the most part amid October's sell-off. However, they are the same names that helped spur the 10-year bull run and if the markets want to end 2018 on a positive note, it will need the FANG stocks to perform.
"It's been a tough month across the board, whether you're in the growth index, or in the value index, or in the S&P 500. All these indexes have broken their bull market trend levels. I think we're at the lower end of what could be this new developing range. We're momentum investors and we're still seeing the best opportunities in more growth-oriented industries like software," said Ari Wald, head of technical analysis at Oppenheimer on CNBC's "Trading Nation."
Related: How to Hedge Rate Risk With ETFs
Looking at the iShares S&P 500 Value ETF (IVE) and iShares S&P 500 Growth ETF (IVW) head to head, Wald's comments underscore the pain seen in both value and growth. Both ETFs have been tracking lower, but value, represented by IVE, has been slightly ahead.
In the end, market experts say that whether it's growth or value, the best strategy is to just be defensive--being selective with stocks whether the focus is on value or growth. "You should emphasize being defensive overall," said Chad Morganlander, portfolio manager at Washington Crossing Advisors. "What we've noticed over 27 years of doing this is that when global growth starts to decelerate, that growth stocks actually are quite vulnerable. Momentum starts to break down, and you start to see growth companies have to ratchet down their future expectations."
In a recent poll on CNBC, readers were asked to help settle the value versus growth debate and thus far, it appears that a best-of-both-worlds strategy is winning.
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