Market Overview

This Value ETF Could Finally Have Its Day

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This Value ETF Could Finally Have Its Day

It's been a while since value stocks beat their growth rivals. In fact, the once-beloved value factor has mostly lagged growth, and by wide margins, over the past decade-plus.

What Happened

Over the past few years, there have been inklings that value was on the mend, but investors were often left disappointed. This time around could be different and the Direxion Russell 1000 Value Over Growth ETF (NYSE: RWVG) could be the prime avenue for exploiting that trend.

RWVG follows the Russell 1000 Value/Growth 150/50 Net Spread Index, a benchmark that not only features a short growth component but an increased long value allocation.

“Within large-cap stocks, growth continues to outdistance value by an ever-widening margin,” according to Barron's. “With the exceptions of small drawdowns of less than 5% in 2013 and 2016, growth has been in a 13-year bull market. In a low-interest-rate environment, growth gets capitalized at higher multiples of earnings, growth, and revenue.”

Why It's Important

Many of the sectors with the growth designation – think communication services and technology just to name a pair – are not considered defensive. On the other hand, value funds usually feature a broader mix of cyclical and defensive fare.

Within RWVG, due to the 150% long exposure, the fund devotes over 30% of its weight to financial services stocks. There's some risk there because the sector is lagging and being plagued by low interest rates and dour prospects for near-term dividend growth. Conversely, RWVG allocates over 40% of its weight to the healthcare, consumer staples and utilities sectors – the three most defensive sectors.

Rising interest rates historically favor value stocks, but that catalyst is off the table this year, meaning the factor's resurgence and potential upside for RWVG likely lies in the hands of the economy rebounding.

What's Next

Another issue to consider when it comes to RWVG's near-term prospects is the extreme gap between value and growth. The Russell 1000 Value/Russell 1000 ratio continues plummeting, meaning value is getting cheaper while growth is getting pricier.

That situation can exist for long time frames, meaning it could take awhile to be reconciled, but if that reconciliation arrives sooner-than-expected, RWVG could be a compelling idea against that backdrop. The Direxion fund needs to gain almost 50% to return to its previous 52-week high, indicating upside from here could be substantial.

 

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Posted-In: Long Ideas News Broad U.S. Equity ETFs Specialty ETFs Trading Ideas ETFs

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