Growth Stocks Are Gaining Traction Over Value
As global uncertainty dissipates and the equities markets push toward new highs, growth stocks and related exchange traded fund are beginning to outpace the value category.
Over the past week, the iShares S&P 500 Growth ETF (NYSE:IVW), Vanguard S&P 500 Growth ETF (NYSE:VOOG) and SPDR S&P 500 Growth ETF (NYSE:SPYG) returned about 1.4%. The growth S&P 500 ETFs also increased 4.9% over the past month.
In contrast, the iShares S&P 500 Value ETF (NYSE:IVE), Vanguard S&P 500 Value ETF (NYSE:VOOV) and SPDR S&P 500 Value ETF (NYSE:SPYV) gained 0.6% over the past week and rose 4.0% over the past month.
Value stocks typically trade at cheaper prices relative to fundamental measures of value, such as earnings and the book value of assets. In contrast, growth stocks tend to run at higher valuations since investors expect the rapid growth in those company measures.
Specifically, the S&P 500 Growth ETFs' top sectors include tech 27.9%, healthcare 17.5% and consumer cyclicals 15.9%. In comparison, the S&P 500 Value ETFs are heavy on financials 21.9%, energy 12.9% and healthcare 12.7%.
Meanwhile, the blended iShares Core S&P 500 ETF (NYSE:IVV), Vanguard 500 Index (NYSE:VOO) and SPDR S&P 500 ETF (NYSE:SPY) were up 1.0% over the past week and 4.4% higher for the past month.
The S&P 500 ETFs' top sector allocations include tech 18.0%, healthcare 15.2% and financial services 13.9%.
Investors are typically more aggressive during periods of heightened volatility and would chase popular growth stocks. Since growth stocks show high multiples, investors may expect that the companies will sustain a high growth rate. In contrast, traders may feel that firms with low multiples would continue to experience tepid growth. However, the value style came into focus this year after a bout of heightened market volatility and lingering global uncertainty pushed investors away from riskier high-growth stocks.
The growth style, though, may be gaining momentum as investors turned to upbeat economic and earnings data, causing many to adopt a more risk-on attitude.
According to Thomson Reuters data, of the 70 S&P 500 companies reported as of Wednesday, 67% companies beat estimates. The numbers reveal an earnings bounce that many were waiting for. The results so far reflect an economy that is still steadily expanding and companies are rebounding.
Moreover, U.S. economic data has been positive over recent weeks, bolstering investment confidence. For example, the number of those filing for unemployment benefits dipped to a three-month low last week, signalling further improvements in the labor market.
Looking ahead, investors will want to keep an eye on the Federal Open Market Committee meeting next week. Recent Fed funds futures rates showed rising options traders' expectation for an interest rate hike. Weighing on the value outlook, the Federal Reserve may still hike interest rates - energy companies, commodity producers and other firms dependent on emerging markets are vulnerable to losses if rates rise.
This article was provided by our partners at etftrends.com.
Full disclosure: Tom Lydon's clients own shares of SPY.