Growth ETFs have been delivering strong returns relative to value ETFs for months, but things could be about to change, according to some market pundits.
Ernesto Ramos of BMO Global Asset Management is warning that investors are overpaying for growth stocks, which have had a phenomenal run on the heels of a growing economy. And Chad Morganlander, portfolio manager with the Washington Crossing Advisors division of Stifel Financial, says growth stocks are overstretched and unlikely to keep leadership over value going forward, particularly in the technology sector.
In the ETF space, it’s not difficult to see growth’s dominance over value. Consider that in the past 12 months, the Vanguard Growth ETF (VUG) has delivered 50% more gains than the Vanguard Value ETF (VTV)—15% versus 10% in annual returns.
Looking year-to-date, the disparity between the two is equally pronounced—VUG is up 2% while VTV is in the red so far in 2018.
Charts courtesy of StockCharts.com
There’s no question that valuations are relatively rich for growth stocks. VUG, which is one of the biggest U.S. large-cap growth ETFs, currently has a price to earnings ratio of 28.38—that’s the weighted average ratio of stock prices to trailing earnings. Price to book of the portfolio is 5.75, according to FactSet data.
By comparison, VTV’s portfolio has a price to earnings ratio of 21.20 and price to book of 2.24.
No Clear Demand Picture
But when it comes to how ETF investors feel about the prospects of slowdown in growth ETF performance, and a resurgence of the value play, the jury is still out. In the past 12 months, growth and value ETFs have seen a mixed bag of investor demand.
Consider some of the biggest ETFs in both these segments by Vanguard, iShares and Charles Schwab. On the growth side, VUG took in $2.65 billion in net inflows, while the Schwab U.S. Large-Cap Growth ETF (SCHG) attracted $840 million in net creations. But the iShares Russell 1000 Growth ETF (IWF) and the iShares S&P 500 Growth ETF (IVW), for example, have both seen sizable net redemptions, collectively, of $1.8 billion in 12 months.
On the value side, VTV raked in $2.99 billion in the past year—slightly more than VUG’s haul. But demand among some of the most popular value ETFs is equally mixed, with the iShares Russell 1000 Value ETF (IWD) bleeding $3 billion in 12 months, while the iShares S&P 500 Value ETF (IVE) gathered $1.17 billion. The Schwab U.S. Large-Cap Value ETF (SCHV) took in $560 million.
Collectively, these four value ETFs command some $90 billion in combined assets under management, while the four competing growth funds boast almost $100 billion in combined assets. It remains to be seen whether talk of some sort of reversion in the growth versus value battle will cause investors to adjust these allocations.
Contact Cinthia Murphy at [email protected]