“Value investing by its very nature is contrarian.” That’s how famed hedge fund manager Seth Klarman once described it. And given the massive underperformance of value stocks relative to growth over the past few years, Klarman’s observation of value investing as a contrarian strategy is spot on.
But trends on Wall Street can go in or out of style in a hurry. And the previous trend of growth over value is, at least for now, on pause. The iShares S&P 500 Value ETF (IVE) has jumped 9.8% year-to-date versus just a 5.3% rise in the iShares S&P 500 Growth ETF (IVW). The 2021 performance for IVE has even outdone unscreened S&P 500 ETFs like the iShares Core S&P 500 ETF (IVV) and the much older SPDR S&P 500 ETF Trust (SPY).
The stocks inside the IVE fund are S&P 500 companies screened for value characteristics, and the fund’s sector exposure is dominated by financials (20.5%), health care (14.2%) and industrials (11.8%). The $21.2 billion fund charges annual expenses of 0.18%.
Value investing was popularized by Benjamin Graham and David Dodd during their time as professors at the Columbia Business School during the late-1920s. The strategy involves buying stocks that are out-of-favor or trading at a discount to the intrinsic value of the underlying business. Their book, “Security Analysis,” published in 1934, laid the intellectual foundation for modern-day value investing.
Much of the hot performance that value-stock ETFs have experienced is due to their heavy exposure to surging financial services stocks. For example, the Vanguard Value ETF (VTV) has almost 25% of its sector exposure to financials alone. With $72.2 billion under management, VTV is the biggest value-oriented ETF by assets.
The same trend of heavy exposure to financial stocks is seen across the board with other value ETFs.
The Vanguard Small-Cap Value ETF (VBR) has 29.6% exposure to financial stocks and it’s up 17.3% year to date. The fund is among the top value-equity ETFs by assets with $23.4 billion under management. It charges annual expenses of 0.07%
For financial advisors looking for a more tactical alternative to plain vanilla value and growth ETFs, Direxion offers a pair of relative weight ETFs targeting U.S. large-cap stocks in the Russell 1000 index.
The Direxion Russell 1000 Value Over Growth ETF (RWVG) provides 150% long exposure to value stocks in the Russell 1000 index while simultaneously staying 50% short to growth stocks in the same yardstick. The index is rebalanced monthly to keep the long/short ratios aligned.
RWVG has jumped 15.2% this year while its counterpart, the Direxion Russell 1000 Growth Over Value ETF (RWGV), has fallen 4.9%. Advisors with a bullish view on value stocks can get the extra kick of overweighting value stocks while concurrently underweighting growth. It also provides a more simplified one ETF trade compared to being long value stocks with one trade and short growth stocks via another.
Using value ETFs saves advisors the time from researching and handpicking a portfolio of value stocks. Likewise, the automated feature of index rebalancing ensures the stocks held by value ETFs remain true to the strategy.
Ron DeLegge is founder and chief portfolio strategist at ETFguide, and is the author of “Habits Of The Investing Greats.”