Growth has trounced value from 2007 – 2020, but that dynamic may be reversing. That’s great news for exchange traded funds like the SPDR S&P 500 Value ETF (SPYV ).
SPYV’s underlying index – the S&P 500 Value 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.
At the sector level currently, energy, financial services, and healthcare look like some of the more credible value destinations. That’s relevant when discussing SPYV because those groups combine for about 40% of the ETF’s weight.
“The resurgence of value stocks has been a dominant theme over the past few months, culminating in the largest monthly excess return over growth stocks in February (9% and a two standard deviation event) since 2008,” notes Matthew Bartolini, head of SPDR Americas Research. “And it hasn’t been just large-cap value that has produced strong above market returns. Up and down the cap spectrum and beyond the shores of the US, value has had a strong start to 2021, as well as over the past four months as the dual headwinds of election and vaccine timeline uncertainty were removed.”
Is This Time (Really) Different?
“Fourteen different value approaches (ranging from sector neutral to small cap to emerging market) have outperformed their respective broad market segments both in 2021 and since the end of October – with the average excess return of 6% and 10%, respectively,” continues Bartolini.
Value stocks usually trade at lower prices relative to fundamental measures of value, like earnings and the book value of assets. On the other hand, growth-oriented stocks tend to run at higher valuations since investors expect rapid growth in those company measures. Many investors are growing wary of high valuations in growth stocks.
As Bartolini notes, value’s durability centers on two factors.
“A reflating of the economy, benefiting rate sensitive equites – correlation and beta profile (55%/ 0.30) to rates is higher than both the market and growth disciplines (34%/0.12 and 27%/0.11, respectively),” he says. “Above market growth, plus attractive valuations at a time of stretched metrics elsewhere – Earnings-per-share growth (25%) is above that of growth styles (20%) and the market (24%). And relative valuations for S&P 500 value stocks are in the bottom decile across Price-to-Next-Twelve-Month-Earnings Ratio, Price-to-Book Ratio, and Price-to-Sales Ratio compared to top decile for S&P 500 growth stocks.”
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