The 2017 market has been defined by momentum-driven trends in high growth sectors such as technology and consumer discretionary stocks. The pervasive strength can be attributed to a cadre of household names that have made impressive new highs this year. Apple, Amazon, Facebook, Google, Netflix and others have crushed traditional broad-market benchmarks as their stock prices surge and volatility remains muted.
As these market forces exert themselves, the concomitant effect is that conventional value stocks have shown a far more muted pace. Companies in the energy, financial, utility, and consumer staples sectors have lagged the major indexes as investors focus on chasing the strongest performers of the year.
One illustration of this is the effect is the comparison between the Vanguard Growth ETF (VUG) and the Vanguard Value ETF (VTV) since the start of 2017. These ETFs are comprised primarily of large-cap stocks within their respective categories and serve as tools to tilt a portfolio towards specific exposure criteria.
VUG holds a commanding double-digit lead over its counterpart that has steadily widened over most of the year. It should come as no surprise then that the fund has accumulated over $3 billion in new assets for 2017 according to data from ETF.com.
Nonetheless, the more interesting story may be how steadfast value investors have remained to their cause. VTV has taken in more than $5.4 billion in fresh capital over that same time frame with very little weekly outflows. The fund’s total assets now stand at an impressive $66 billion (ETF and mutual fund shares combined).
It’s not just VTV that has been on an asset gathering spree either. Eric Balchunas, Senior ETF Analyst at Bloomberg Intelligence, noted that value ETFs as a smart beta class took in over $7 billion last week alone. He posted the following chart on Twitter depicting just how impressive this feat is compared to other factors in the field over the last several years.
Source: Bloomberg terminal via Twitter.com
Recipients of this massive inflow included funds such as VTV, alongside the iShares S&P 500 Value ETF (IVE), iShares Core S&P U.S. Value ETF (IUSV), and other ETFs in this category. Most of the capital allocation going towards passive indexes with low fees, broad diversification, and highly liquid holdings.
While those ETFs may be the most suitable for investors looking to build core allocations to value stocks, they aren’t the only game in town. The ValueShares U.S. Quantitative Value ETF (QVAL) is one example of a factor purist ETF that owns just 40 U.S. stocks selected according to rigid fundamental criteria. QVAL has gained +25% this year compared to +17% for VTV and just recently hit new all-time highs.
One conclusion to be drawn from this conviction in value-focused indexes is that this factor could be due for a comeback in 2018. The widening gap between the two disciplines may have some investors counting on the resurgence in the financials and energy sectors compared to further extension in technology stocks.
This may also be a more conservative option for those who are concerned about a market tumble next year. Investors who want to own correlation to the market may perceive value stocks as a safer bet than the stretched fundamentals of their growth-oriented peers.
The Bottom Line
Some may opt to believe that value investing has been forgotten compared to the flash of high momentum stocks. The reality is that this factor has been quietly building throughout the last year and may ultimately sneak into the spotlight once again.
Note: At the time this article was written, some clients of FMD Capital Management owned shares of IVE.