The performance gap with growth stocks over value has been among the top investing trends of 2020. What’s behind the trend and will it continue?
The Invesco S&P 500 Pure Growth ETF (RPG) has gained 12.2% year to date while the its counterpart, the Invesco S&P 500 Pure Value ETF (RPV), has slid into bear territory, falling 23.6%. The sub-par results for ETFs that hold value stocks has been widespread and most industries associated with value stocks are in a deep slump.
Financial stocks (33.6%) and energy (12.2%) were among RPV’s top three sector holdings at the end of the second quarter. Both industry groups have been laggards within the S&P 500 Index and the Financial Select Sector SPDR Fund (XLF) has declined 16.6% while the Energy Select Sector SPDR Fund (XLE) has cratered a tick under 40%.
RPV uses three ratios—book-to-value-to-price, earnings-to-price and sales-to-price—to determine which value stocks get included in fund’s index. Nonetheless, RPV’s longer-term performance compared to RPG has disappointed. During the past 10 years, RPV has gained 154.4%, not including dividends, versus 318.5% for RPG.
The performance advantage of growth stocks over value has lifted growth stock valuations to overstretched levels.
“Growth stocks tend to trade at premium to value stocks, but in recent months it’s become 50% over value stocks when in history it’s been closer to around 14%,” said Lance McGray, head of ETF product at Advisors Asset Management. The Colorado-based firm has a menu of dividend value ETFs targeting the S&P 500, along with international developed and emerging markets. McGray has been monitoring signs of possible rebound in value stocks. “If there’s more news about a potential Covid-19 vaccine, that could be the catalyst to get value securities up and running and to close that disparity cap rather quickly.”
Last year, Direxion Investments introduced a pair of ETFs that allow advisors to capture the performance differences between growth and value stocks. The Direxion Russell 1000 Growth Over Value ETF (RWGV) is 150% long the Russell 1000 Growth Index while 50% short the Russell 1000 Value Index. This mix has produced a 45.2% year-to-date gain while its counterpart, the Direxion Russell 1000 Value Over Growth ETF (RWVG), has slid 24.3%.
Technology stocks are the largest component in most growth equity ETFs, while sectors like financials and energy are heavily weighted in value ETFs. And while some observers are quick to point out the historical meltdown of dot-com stocks, the growing importance of technology on the broader economy is more than just a short-lived fad.
Indeed, major structural shifts in business are at work.
For example, advertisers now spend four times the amount on digital ads compared to newspapers. By comparison, the amount spent on global digital advertising in 2007 accounted for less than half of the overall spend on newspaper ads. What changed? Advertising platforms including Facebook, Instagram, YouTube and Twitter were just getting started or didn’t exist when the trend in digital ad spending was beginning to take off in the mid-2000s.