The value factor is lagging its growth and momentum rivals in a big way this year, but that does not mean obituaries for value stocks should be written. Some exchange-traded funds dedicated to value stocks offer long-term promise, particularly at a time when the value factor is doing what it is supposed to do: offer value.
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The iShares Edge MSCI USA Value Factor ETF (BATS: VLUE) is an idea to consider for investors interested in preparing for a value renaissance. Home to $2.5 billion in assets, VLUE seeks to track the performance of an index that measures the performance of U.S. large- and mid-capitalization stocks with value characteristics and relatively lower valuations, before fees and expenses, according to iShares. Soft economic growth expectations have hampered value stocks this year.
This is important as value tends to perform better when economic expectations are rising, said BlackRock in a recent note. In contrast, when economic growth is modest, investors are more likely to put a premium on companies that can generate organic earnings growth, regardless of the economic climate. This dynamic helps explain the strong year-to-date rally in technology stocks.
VLUE is up about 8 percent year-to-date, a decent performance among value ETFs, but one that still lags the S&P 500 by around 300 basis points. In terms of sector allocations, VLUE is a departure from traditional value ETFs, which are often heavy on energy and financial services stocks, or both.
The iShares fund devotes 23 percent of its weight to the technology sector, an allocation to that sector that is reminiscent of growth ETFs. Alone, Apple Inc. (AAPL) accounts for 10.3 percent of VLUE's weight. VLUE also allocates over 14 percent of its weight to the healthcare sector and several of the ETF's holdings from that sector hail from the biotechnology space, again giving VLUE the feel of a growth ETF.
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Additionally, VLUE features an almost 13 percent weight to the consumer discretionary sector, another group that is often a hallmark of growth and momentum funds. Financials, a credible value sector, are VLUE's third-largest sector weight at 14.1 percent.
Value In Value
Bolstering the case for VLUE and rival value strategies is that the factor is increasingly inexpensive relative to growth.
Since 1995 the average ratio between S&P Value and Growth price-earnings (P/E) ratios has been 0.45, i.e. value typically trades at a 55% discount to growth. Currently the ratio is 0.30, close to two standard deviations below the long-term average. Value has not been this cheap relative to growth since early 2000, according to BlackRock.
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