In recent weeks, investor sentiment for value-oriented strategies has significantly improved. As market volatility has increased, stocks in the S&P 500 Value Index held up better than growth alternatives, while demand for value exchange traded funds has swelled.
While CFRA is favorable on certain value-oriented sectors heading into 2019, the popular value-focused funds provide very distinct exposures.
In the first half of 2018, growth ETFs had $8.2 billion of net inflows, easily exceeding the $2.2 billion for value ETFs, according to Eric Balchunas, senior ETF analyst at Bloomberg Intelligence. However, in the nearly six-month period ended Dec. 7, investors have returned aggressively, piling $15 billion into value ETFs, more than five times the inflows for growth funds. Demand is accelerating. After a $7 billion cash haul in the third quarter, value ETFs have already surpassed that level with $8.5 billion in the two-plus months of the fourth quarter.
The S&P 500 Index is unevenly split between growth and value, based on various earnings trends and valuation characteristics, and is reconstituted annually. While the S&P 500 Growth Index’s 2.9 percent gain remains ahead of the losses achieved by the broader S&P 500 (-1.5 percent) and the S&P 500 Value (-6.2 percent) indexes year-to-date (through Dec. 7), the gap has narrowed in recent months. In the last 13 weeks, the S&P 500 Value Index’s 7.2 percent loss was smaller than the 9.3 percent loss for the Growth Index.
As earnings and GDP growth slow and monetary policy tightens in 2019, growth sectors will be less likely to drive market performance in the new year, says CFRA Investment Strategist Lindsey Bell. She looks for value to play a larger role as investors look for attractive valuations and defensive characteristics in the late stages of a bull market.
CFRA’s Investment Policy Committee has three overweighted sector recommendations, one traditionally growth oriented (Information Technology) and two value plays (Energy and Utilities). Meanwhile, value-oriented Consumer Staples and Real Estate were upgraded in early December to marketweight from underweight, while fellow value-strategy favorite Financials was downgraded to underweight.
Thus far in the fourth quarter, three value ETFs have gathered more than $1 billion in assets: iShares Russell 1000 Value Index ETF (IWD), SPDR Portfolio S&P 500 Value Index ETF (SPYV) and Vanguard Value Index (VTV). While CFRA has a top ratings on all three ETFs, they are constructed differently.
SPYV tracks the S&P 500 Value Index discussed above, so let’s start there. The index consists of S&P 500 constituents that exhibit the strongest value characteristics based on book-value-to-price, earnings-to-price and sales-to-price ratios.
Relative to the broader S&P 500—tracked by SPDR S&P 500 (SPY)—SPYV had more exposure to Financials (23 percent of assets versus 13 percent), Energy (12 percent versus 6 percent), Consumer Staples (11 percent versus 8 percent) and Utilities (6 percent versus 3 percent), as of early December. In contrast, Technology (7 percent versus 20 percent), Health Care (12 percent versus 16 percent) and Consumer discretionary (6 percent versus 10 percent) were underexposed.
In contrast, IWD had more exposure to Health Care (16 percent) and Information Technology (9 percent) than SPYV and less exposure to Energy (10 percent) and Consumer Staples (8 percent). In addition to starting from a more multi-cap universe than SPYV, book-to-price ratio is the favored value criteria for the Russell Index.
While VTV doesn’t disclose daily holdings, this value ETF recently had more exposure to Technology (15 percent as of the end of October) than IWD and SPYV, and less exposure to Energy (7 percent) and Real Estate (1 percent). The CRSP Index behind VTV incorporates book-to-price, forward-earnings-to-price, historic-earnings-to-price, dividend-to-price and sales-to-price ratios.
SPYV has the lowest expense ratio of the three ETFs, at 0.04 percent, but year-to-date through Dec. 7 was the worst performer of the trio, declining 3.9 percent. Despite charging just one basis point more, VTV lost only 0.7 percent this year; IWD charges a 0.20 percent expense ratio and was down 3.2 percent this year.
Such performance differences highlight that investors should not just choose to tilt their portfolio toward value, but to look inside to understand what they’re getting. CFRA’s ETF research provides insight on a forward-looking basis and does not rely on past performance.
Todd Rosenbluth is the director of ETF and mutual fund research at CFRA. Learn more about CFRA’s ETF research here.