It’s been said that the more things change, the more they stay the same. And while a lot has changed since the late 1990s, the massive outperformance of growth stocks over value stocks bears a striking resemblance to past markets.
This time around, growth-oriented exchange-traded funds tracking U.S. stocks in large-, mid- and small-cap categories are trouncing value-focused products based on the same indexes.
The Invesco S&P 500 Pure Growth ETF (RPG) has gained 5% year to date while its counterpart, the Invesco S&P 500 Pure Value ETF (RPV), has slumped almost 30%. RPG’s sector weighting is dominated by information technology (38.2%), and the outperformance of large-cap tech stocks in 2020 has contributed to its strong upswing.
Meanwhile, RPV’s dominant sector is banking and financial stocks (34.2%), which have been among the S&P 500 Index’s lagging groups. In the mid-cap and small-cap arena, the same pattern of growth’s outperformance over value has played out. The Invesco S&P MidCap 400 Pure Growth ETF (RFG) has a modest year-to-date decline of just 0.98%, whereas the Invesco S&P MidCap 400 Pure Value ETF (RFV) has lost 25.3%.
Meanwhile, small-cap value has been the worst year-to-date performer among all U.S. equity sizes. The Invesco S&P SmallCap 600 Pure Value ETF (RZV) has fallen 33.5% since the start of the year while its peer, the Invesco S&P SmallCap 600 Pure Growth ETF (RZG), has slid 14.9%.
The “pure style” series used by Invesco’s ETFs separate growth stocks from value within the S&P 500, S&P MidCap 400 and S&P SmallCap 600 indexes by using financial criteria or factors.
Growth stocks, for example, are measured using three factors including three-year sales per share growth, the three-year ratio of earnings per share change to price per share, and 12-month share price momentum. In contrast, the “value score” selects stocks by entirely different criteria including a stock’s book-value-to-price ratio, earnings-to-price ratio, and sales-to-price ratio.
Style purity prevents growth stocks from overlapping value within the same index ETF, thereby allowing advisors and their clients to express their undiluted investment bias.
Dan Lefkovitz, strategist for Morningstar’s Indexes group, observed the huge disconnect in performance between U.S. growth and value stocks. He noted that if the year finished this way, it would be growth's largest margin of outperformance versus value since 1999, when the Morningstar US Growth Index gained 44.5% and the Morningstar US Value Index declined 1.3%.
Based on analyst estimates, the Morningstar US Growth Index trades at a 21% premium to fair value, while the Morningstar US Value Index is 11% undervalued. “Investors should remember that growth and value go through cycles, and right now there’s value in value,” Lefkovitz said.