Higher interest rates and runaway inflation continue to put pressure on the riskiest areas of the stock market. This includes richly valued high-growth companies with minimal profits. At the same time, value stocks have begun to assert themselves as performance leaders. Can the trend continue?

In reality, the outperformance of value stocks over growth started roughly two years ago.

After Pfizer’s announcement of a Covid vaccine in November 2020, the MSCI World Value Index began outperforming the MSCI World Growth Index by over 15%.

ETFs linked to U.S. value stocks have exhibited the same kind of market-beating trend.

The Vanguard Value Index Fund ETF (VTV) has gained 33.64% over the past two years while there’s been a gain of only 7.78% for the Vanguard Growth Index Fund ETF (VUG). Moreover, it’s been a winning strategy for funds to have more value stocks than the style neutral SPDR S&P 500 ETF (SPY). The Vanguard value fund outperformed SPY by an impressive 12.51% over the same two-year time frame.

For financial advisors, the message should be clear: Value investing is back, so allocate client money accordingly.

The history of markets teaches us that investing styles don’t just take their turn in the limelight, but the duration of time they spend on top can last over a period of years.

After the dot-com crash, value stocks experienced a performance edge of 90% that lasted for seven years. Then in 2007, growth stocks came roaring back and outperformed their value peers for an incredible 13 years. Throughout that last painful period, value stocks universally posted disappointing results against securities across multiple industry sectors and geographies.

Despite the recent outperformance of value ETFs, a research piece from J.P. Morgan Asset Management published earlier this year indicates that valuations among value stocks are still attractive. “Valuation spreads between value and growth stocks remain very wide. Spreads are still more extreme than at the height of the dot-com bubble.”

Another bullish factor is people’s continued underinvestment in value stocks.

According to Morningstar’s first quarter 2022 data, fund assets in the global large-cap-blend category were nine times larger than they were in the value category, and growth assets were five times bigger. Put another way, the recent run in value equity funds has coincided with fund investors not being positioned to benefit.

Beyond broader ETFs with a value bias, like the previously mentioned Vanguard Value Index Fund ETF, advisors can consider adding value ETFs with other compelling screens, such as high income. This could be especially appealing for retired clients who seek immediate income that is sustainable and growing.

The ALPS Sector Dividend Dogs ETF (SDOG) is one such example. The fund applies the “Dogs of the Dow” theory on an industry sector basis using the S&P 500 as a pool of eligible stocks. The ALPS fund provides high dividend exposure across 10 sectors of the market by selecting the five highest-yielding stocks in each sector and equally weighting them. Thus far this year, the fund has outperformed the S&P 500 and carries a better dividend yield that hovers in the 4% vicinity.

In summary, nobody knows how long the trend of value over growth will last. But for now, it seems like an important and developing trend that has a long runway.

All performance figures are through the September 13, 2022, market close.