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Why The Energy Sector Could Spark A Resurgence In Value ETFs

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Why The Energy Sector Could Spark A Resurgence In Value ETFs
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At least two important factors should be noted with exchange traded funds dedicated to value funds. First, the value factor has been trailing growth for a significant portion of the current bull market. Second, many traditional value ETFs are dominated by a small amount of sectors.

Sector-level concentration risk should also be considered, but with energy often looming large in value ETFs, value funds could be bolstered if the once-downtrodden sector's recent bullish trends continue. 

What Happened

The energy sector was a dud for essentially all of 2017 and much of the first quarter of 2018, but the group started snapping out of its funk in a big way in April.

April “was the S&P 500 Energy’s 17th-best month on record since October 1989, and it gained most since September 2017,” according to S&P Dow Jones Indices.

Year-to-date, the S&P 500 Value Index is trailing the S&P 500 and the S&P 500 Growth Index, but last month, the value benchmark was even with its growth rival and the broader S&P 500.

Why It's Important

Some well-known value ETFs are heavily allocated to energy stocks. For example, the $15.5-billion iShares S&P 500 Value ETF (NYSE: IVE) allocates nearly 13 percent of its weight to energy stocks, its second-largest sector weight behind financial services. IVE follows the S&P 500 Value Index.

The PowerShares S&P 500 Pure Value Portfolio (NYSE: RPV) devotes 12.24 percent of its roster to energy stocks, also that ETF's second-largest sector exposure behind financials. RPV surged 5 percent last month. In the cases of IVE and RPV, the ETF's energy exposure is more than or close double that of the S&P 500. Conversely, the S&P 500 Growth Index has an energy weight of just 0.3 percent.

What's Next

“Energy’s outperformance not only propelled small caps to outperform large caps (since smaller energy companies rise more with oil) but drove value to outperform growth,” said S&P Dow Jones. “The S&P 500 Value has 12.5 percent more energy than the S&P 500 Growth, which has nearly none.”

Due in part to energy's resurgence, value stocks across all market values — large, mid and small — outperformed growth in April.

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