Markets

Time for Value ETFs Ahead?

Value stocks and ETFs have lagged the growth ones this year due to an extremely low level of interest rates. The coronavirus outbreak has led the Fed to cut rates to zero and launch QE this year in order to help fight the economic slowdown. This has kept rates super subdued this year and boosted growth investing. However, the trend has been shifting of late.

Bond yields crept higher last week, with the 10-year yield touching a level not reached since June, as quoted on CNBC. The CNBC article indicated that strategists were expecting stimulus, it’s now or after the election. This in turn has led to an increase in treasury yields. U.S. economic data points also came in better than expected lately, giving another boost to treasury yields.

Although bond yields logged a downturn to start this week, benchmark yields are still pretty higher than what we saw at the start of the month.

Value Investing to Get Charged Up?

There has been a gradual shift from growth stocks to value stocks in recent weeks, which means that investors are wagering on increased inflation and higher rates. SPDR Portfolio S&P 500 Value ETF SPYV has added 3.7% in the past month and was up 0.1% last week. SPDR Portfolio S&P 500 Growth ETF SPYG has gained 3% in the past month and lost 0.8% last week (read: Trump or Biden, These Value ETFs & Stocks Are Set to Soar).

Per a Reuters article, some investors are wagering that treasury yields may remain steady in the medium term. This is especially true given that lawmakers “appear ready to deliver more fiscal stimulus in coming months, a vaccine against COVID-19 may come next year, and more U.S. Treasury bond offerings are set to weigh on prices.” If this happens, one can expect a continued rally in value stocks.

Fundamentals Strong Yet Uncertainty Lingers

Apart from a bet on interest rates rise, a shift from momentum or growth stocks to value stocks could be used as a flight to safety by investors concerned about rising COVID-19 cases ahead of winter, even as the market hovers around lofty levels. The United States reported more than 83,000 coronavirus cases on Oct 23, marking a record daily total.

Moreover, U.S. economic fundamentals are improving even as uncertainty lingers. The U.S. economy added 661 thousand jobs in September 2020, easing sharply from an upwardly revised 1.489 million in the previous month, but fell shy off market forecasts of 850 thousand. Retail sales in the United States increased 1.9% sequentially in September 2020, following a 0.6% gain in August and beating forecasts of a 0.7% increase.

As far as manufacturing data is concerned, although the ISM Manufacturing PMI for the month of September marked the fourth successive month of expansion in factory activity, the growth rate slowed from August's near two-year high. The presidential election creates uncertainty for the coming weeks. Such an investing backdrop should propel value stocks and ETFs higher.

Value ETFs in Focus

Against this backdrop, below we highlight a few value ETFs that could be good bets for the near term.

iShares Focused Value Factor ETF FOVL – P/E 9.73X

The fund gives exposure to the performance of 40 large and mid-cap U.S. companies with prominent value characteristics. It follows a rules-based approach that manages for unrewarded risk while seeking high exposure to value companies. FOVL charges 25 bps in fees.

iShares Factors US Value Style ETF STLV – P/E 10.99X

The fund delivers efficient access to select securities within the Russell 1000 Value Index that provide favorable exposure to five proven drivers of return: financially healthy firms, stocks that are inexpensive, smaller companies, trending stocks, and lower volatility stocks. It charges 25 bps in fees.

Invesco S&P 500 Enhanced Value ETF SPVU – P/E 11.44X

The fund tracks the S&P 500 Enhanced Value Index. The underlying index tracks the performance of stocks in the S&P 500 Index that have the highest "value score." Constituents are weighted by their market capitalization and their value score.

iShares Select Dividend ETF DVY – P/E 11.55X

The fund offers exposure to broad-cap U.S. companies with a consistent history of dividends. The fund charges 39 bps in fees.

Invesco S&P 500 Pure Value ETF RPV – P/E 11.99X

The underlying index of the fund measures the performance of securities that exhibit strong value characteristics in the S&P 500 Index. First, each security in the S&P 500 is assigned two “style scores” — one for value and one for growth.

The “value score” is measured using three factors: book-value-to-price ratio, earnings-to-price ratio, and sales-to-price ratio. The “growth score” is measured using three other factors: three-year sales per share growth, the three-year ratio of earnings per share change to price per share, and momentum (the 12-month percentage change in price). The fund charges 35 bps in fees.

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iShares Select Dividend ETF (DVY): ETF Research Reports
 
SPDR Portfolio SP 500 Value ETF (SPYV): ETF Research Reports
 
SPDR Portfolio SP 500 Growth ETF (SPYG): ETF Research Reports
 
Invesco SP 500 Pure Value ETF (RPV): ETF Research Reports
 
Invesco SP 500 Enhanced Value ETF (SPVU): ETF Research Reports
 
iShares Factors US Value Style ETF (STLV): ETF Research Reports
 
iShares Focused Value Factor ETF (FOVL): ETF Research Reports
 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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