There are a lot of people looking for signs that value stocks are back in the game, ready to outperform their growth counterparts after a decade or so of trailing them.
Last week, when markets seemed to punish some of the year’s leaders, such as growth and momentum strategies, as well as gold and even some Treasury funds, all eyes turned to the underdog, value. Is now the time?
ETF asset flows, while modest, would help corroborate the idea that investors are back to embracing value. Flows are a good indicator of investor sentiment, if a laggard one, and in the past week, some value ETFs did pick up assets while growth ETFs bled.
For example, the biggest value ETF in the market, the Vanguard Value ETF (VTV) saw $64 million in net inflows in the last week. The Vanguard Growth ETF (VUG), meanwhile, saw $12 million in net outflows at the same time. These flows came hand in hand with VTV’s outperformance for the week:
A pair of pure style strategies from Invesco saw similar action: the Invesco S&P 500 Pure Value ETF (RPV) gathered $40 million, while the Invesco S&P 500 Pure Growth ETF (RPG) lost a net of $6 million.
These funds, which fish for the top-third highest value stocks in the S&P 500 and top third highest growth-y stocks in the broader index, respectively, offer perhaps a purer exposure to these styles. And in the past week, their performance disparity was even wider. There is almost 6 percentage points between their returns, with value at the lead:
These net creations don’t really move the needle—VTV is a $50 billion fund, making a $64 million infusion barely a drop in the bucket. RPV has nearly $1 billion in total assets, so from a percentage of assets perspective, last week’s net inflows don’t add up to much.
That said, if you are looking for confirmation that investors are warming to the idea of returning to value stocks, the numbers are at least trending in that direction—to the extent that you can call one week’s worth of data a new trend.
Year to date, value ETFs remain laggards to their growth counterparts, and VTV and RPV are also underperforming the SPDR S&P 500 ETF Trust (SPY), which is up about 22% in 2019:
Charts courtesy of StockCharts.com
But there’s no question that growth stocks today are richly valued, near historical levels. If you look at price-to-book as a valuation metric, VTV’s portfolio currently has a P/B of 2, while VUG is sitting at a P/B of 7—the valuation of this growth portfolio is more than 3x that of its value counterpart, and more than double that of SPY. Growth stocks are expensive.
The same can be said of RPV and RPG—the former has a P/B of 1, while the latter that of 5. That valuation difference is also seen in other metrics, such as price-to-earnings. (You can see these numbers and more in our fund reports.) Value stocks are cheap; growth stocks are expensive.
That’s one of the reasons many have been looking for some sort of correction, a reversion to the mean of sorts, to bring these valuations back in line more.
But it remains to be seen if value ETFs can actually take off. Nick Colas, co-founder of DataTrek Research, recently put out a note that best summarized the massive challenge facing them; namely, their underlying holdings. To put it simply, Colas is a big skeptic that now is value’s time.
“Screening for low valuation stocks with high returns on capital and decent earnings growth gets you a raft of financials names,” Colas said. “And yet, financials are cheap for a reason, ranging from Fed-mandated capital requirements to fewer M&A opportunities than in past cycles and fears over increasingly low/negative global interest rates.”
VTV is 24% allocated to financials; RPV has a 35% allocation to this sector. Financials are the biggest sector in both of these value funds—and in value ETFs in general.
Noting that large cap financials in the S&P 500 have yet to retest pre-Financial Crisis highs last seen in 2007, Colas concluded, “Paint a scenario where financials outperform and that’s when value will beat growth, but not before.”
Growth All About Tech
Value beating growth means financials beating tech. Growth ETFs are dominated by large tech names such as Microsoft, Apple and Alphabet—companies that have done well this year.
(Use our stock finder tool to find an ETF’s allocation to a certain stock.)
VUG has 45% of its portfolio tied to the technology sector, its leading allocation. RPG, too, has tech at the top, with a 22% allocation to the sector.
“To see value outperform growth, we’ll need to get a market that gives up on super-cap tech names,” Colas said. “There is precedent for that in the 2000–2002 bursting of the dot-com bubble, of course.”
“To place an outsized bet on value just now means believing financials will outperform and/or super-cap tech is set for a fall,” he said in the note. “That approach typically works at the start of a cycle, not the end. The value trade will have its day once a recession starts to unfold in earnest and risk-averse investors bail on tech stocks.”
Time will tell whether now is the time for value ETFs. What is certain is that as pundits look for clues in the numbers, the fascination with this long-standing battle between value and growth is here to stay, and nothing gets people excited like the possibility of an underdog rising to the top.
Contact Cinthia Murphy at email@example.com
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