Venturing Into Value's Vindication
It's too early to get excited, but there are inklings that the value factor may be poised to bounce back this year.
So far in 2019, the S&P 500 Value Index is offering modest outperformance of the S&P 500 Growth Index, a theme seen among the exchange traded funds tracking those benchmarks.
SPYV's underlying index “contains stocks that exhibit the strongest value characteristics based on: book value to price ratio; earnings to price ratio; and sales to price ratio,” according to State Street.
Apparently, those traits apply to a significant portion of the S&P 500 because the $2.53 billion SPYV is home to more than 380 stocks.
Why It's Important
Value has been trailing growth for nearly the entirety of the recent bull market in U.S. stocks. Over the past three years, SPYG, the S&P 500 growth ETF, is beating SPVY by 1,630 basis points. For the six years ended 2018, SPYV only outperformed SPYG once on an annual basis.
“But is it not uncommon that value investing goes through periods of underperformance relative to the broader market,” said State Street in a recent note. “What has been uncommon has been the length of time low value stocks have underperformed other equities.”
The Federal Reserve's easy monetary policy following the financial crisis has played a significant part in hampering value stocks.
Value's laggard ways “can be due to a number of reasons, but key among them has been the unusual level of monetary accommodation provided by low rates and quantitative easing (QE),” said State Street. “This has driven risk seeking behavior by investors at the cost of fundamentals that normally provide a catalyst for value stocks.”
Certain sectors, particularly financial services, could be the drivers of value's resurgence.
“For investors who want to position themselves to capture the potential upside after an inflection point in the cycle, we believe three sectors could be attractive targets: Financials, Resources and Industrials,” according to State Street.
Financials, industrials and energy names combine for about 40 percent of SPYV's roster.
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