Market Overview

What Could Spark Value ETFs Back To Life?

What Could Spark Value ETFs Back To Life?

Large-cap value stocks are still struggling against growth equivalents and the broader market. Since 2012, the S&P 500 Value Index has topped the S&P 500 and the S&P 500 Growth Index just twice on an annual basis.

Value stocks have recently been showing some signs of life, but the S&P 500 Value Index has some work to do before the end of 2018 to avoid another laggard year for value stocks.

What Happened

Up 3.3 percent year-to-date, the iShares Edge MSCI USA Value Factor ETF (CBOE: VLUE) has been a slightly better bet than other large-cap value exchange traded funds. VLUE, which is more than five years old, tracks the MSCI USA Enhanced Value Index.

Some market observers suggest there is value in value stocks, but pinning down when the outperformance starts is a different ballgame.

“The view that value looks cheap has become axiomatic; when value will actually start outperforming has been much harder to predict,” said BlackRock. “Despite offering historically low valuations, at least relative to growth, value continues to lag. Year-to-date, the Russell 1000 Growth Index has outperformed the Russell 1000 Value by over 11 percent.”

Why It's Important

Relative to older, more traditional value ETFs, VLUE is heavily allocated to technology. That sector comprises nearly 26 percent of the fund's weight. Apple Inc. (NASDAQ: AAPL) is VLUE's largest holding at nearly 11 percent, a definite rarity among value ETFs.

VLUE's cyclical tilt is important, as strong economic growth could be just what the doctor ordered for value stocks.

“The catalyst most likely to revive value is the same one that drove outperformance during the back half of 2016: an unexpected acceleration in economic growth, particularly nominal growth,” according to BlackRock. “Unfortunately, as everyone now knows, nominal growth has failed to accelerate on schedule.”

Second-quarter GDP growth in the U.S. checked in at 4.1 percent.

What's Next

Expectations for economic growth are increasing, but it could take more numbers like the one seen for the second quarter to send value stocks to the point of outperforming growth fare. In the “signs of life” category, VLUE did top the S&P 500 Growth Index in July.

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