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Don't Count Value ETFs Out Quite Yet

Value investors have struggled over the past decade. The iShares Russell 1000 Growth Index averaged 15.7% annual growth over the last decade, which is about double the iShares Russell 1000 Value Index’s 8.7% over the same timeframe. And this year has been no different, with the growth index returning 14.6% compared to the value index’s 7.5% gains.

But some analysts believe the tide might be turning – and here are the ETFs you may want to reconsider.

A Compelling Case for Value

Bank of America Global Research Analyst Savita Subramanian believes value stocks are better positioned in a high interest rate environment. While inflation climbed ‘only’ 3.4% in April – less than economists thought – JPMorgan CEO Jamie Dimon

In addition to rising government spending on infrastructure and the military, Mr. Dimon points out that further trade restrictions could cause prices to accelerate over the coming months. However, the actual impact of tariffs may depend on whether an increase in price offsets the potential drop in GDP growth. Slower economic growth could lead to rate cuts while rising prices could lead to rate increases.


Source: TradingEconomics

While growth stocks typically rely on debt to finance growth, many large-cap value stocks are profitable with higher levels of free cash flow. Value indexes are also skewed toward cyclical industries like energy or financials, which are well-positioned to benefit from the strong economy and other macroeconomic trends.

Glenmede’s Jason Pride echoed these sentiments, noting that large-cap growth stocks are in the 93rd percentile of valuation relative to history, trading at 21x 2024 earnings. By comparison, large-cap value stocks are ‘only’ in the 77th percentile, trading at 16x 2024 earnings. Value stocks also offer higher dividends, drawing in income investors.

Where To Find Opportunities

Subramanian sees large banks as an interesting value play. With interest rates on the rise, private lenders could make fewer loans, creating an opportunity for banks to recapture market share. Meanwhile, the rise of artificial intelligence-powered automation (e.g., chatbots) could help improve profitability across financial services. The Financial Select Sector SPDR Fund (XLF) and the Invesco KBW Bank ETF (KBWB) are two popular options.

Actively managed ETFs could also offer an opportunity for value investors. Rather than allocating by market capitalization, these funds make dynamic allocations based on value attributes. For instance, the Dimensional Funds U.S. Large Cap Value ETF (DFLV) focuses on securities with a higher expected return and has beat the Russell 1000 Value index benchmark by 2% to 4% depending on the timeframe.


Source: Google Finance

Popular Value-Focused Active ETFs

These funds are sorted by their YTD total return, which ranges from 2.6% to 12.2%. They have AUM between $790M and $11B and expenses between 0.15% and 0.75%. They are currently yielding between 0.7% and 8.4%.

When deciding between these options, it’s critical to look at the underlying select/allocation methodology, diversification, and expenses. For instance, a fund with little diversification could introduce a lot of risk and hurt the risk-adjusted return or have an expense ratio that’s too high to justify the incremental return improvement.

The Bottom Line

Value investors have had a rough decade of returns, but if interest rates remain higher for longer, value ETFs could outperform their growth counterparts. So, it may be time to revisit value ETFs – including active value ETFs – as a vital component in your portfolio moving forward.

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May 20, 2024