Value ETFs Gain Favor Over Growth ETFs

May 23, 2014

Recently choppy market seems to favor value ETFs over growth.

Growth-focused stocks such as Google have come under pressure lately, and index investors grappling with uneven U.S. economic growth are looking elsewhere for equity returns, namely to value-tilted equities.

Assets are moving out of growth ETFs and into value ETFs. For example, the $22 billion iShares Russell 1000 Value ETF (IWD | A-86) has attracted $775 million year-to-date, while its sister growth-focused ETF, the $23 billion iShares Russell 1000 Growth ETF (IWF | A-89), has had outflows of $209 million.

Returns have also differed for the two ETFs. Year-to-date, the value-tilted IWD is up 3.6 percent versus a 1.7 percentage gain for the growth-focused IWF. Google, which has a 3 percent weight in IWD, is slightly in the red this year, as investors shift a bit out of growth and into other pockets of the stock market.

The S&P 500 Index has meanwhile eked out a 2 percent gain, after bouncing around considerably along the way, thanks to a plethora of mixed economic data in the U.S. and signals from the Federal Reserve that interest rates may rise sooner rather than later in 2015.

“Keeping money in a value-oriented portfolio could be a good way to stay invested if you’re concerned about the market’s outlook,” according to Spencer Bogart, an ETF.com analyst. “Value stocks, by definition, don’t have the same lofty valuations as growth stocks, and consequently may be less responsive to market gyrations.”

IWD_Vs._IWF_12Month_performance

Under The Hood

That said, investors looking into value ETFs may want to pay attention to what’s under the hood of the funds as it’s sometimes hard to discern value from growth—particularly these two funds.

As an example, in the past 12 months, the growth-focused IWD and the value-focused IWF were up 20.8 percent and 20.6 percent, respectively. The reason? Some of IWD’s portfolio overlaps with IWF’s portfolio.

While the two ETFs’ top-three holdings do differ, with names such as Exxon, General Electric and Johnson & Johnson only in the value portfolio IWF, and stocks like Microsoft, Google and Verizon only on the growth side, the lines start to blur a bit further down the roster.

For example, both funds hold Apple, Walt Disney and Time Warner. But not all growth and value ETFs are made the same.

For example, the Guggenheim S&P 500 Pure Value ETF (RPV | A-64) has outperformed the Guggenheim S&P 500 Pure Growth ETF (RPG | A-58) by nearly 7.5 percentage points in the past 12 months.

That’s because they both follow “pure” style indexes, which means their holdings don’t overlap at all. Each company can be only growth or value, never both, according to Bogart.

RPG currently has a heavy weighting toward consumer cyclical names such as Netflix, TripAdvisor and Southwest Airlines, while RPV has a heavy focus on financial names such as Berkshire Hathaway and Genworth Financial, an insurance concern. Year-to-date, RPG is up 3.2 percent versus 4.6 percent for RPV.

RPG_Vs._RPV_12Month_Performance

Charts courtesy of StockCharts.com

 

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