Are Value ETFs Finally Priced to Move?

Growth beat value in May by the most since the dot-com era.

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Reviewed by: Lisa Barr
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Edited by: Sean Allocca

Is this the ultimate bottom-fishing moment? That’s what advisors and investors need to ponder after the Russell 1000 Growth Index outperformed the Russell 1000 Value Index by 8% last month.  

That may not sound like much, since growth and value stocks are natural rivals, and investors tend to gravitate from one to the other over time. But that was the worst relative performance month for value since 2000. 

And at this stage of the market cycle, there are a growing number of stock market headlines that include the phrase “since 2000.” Since that was the start of the only period in market history that the S&P 500 index fell for three consecutive years (2000, 2001 and 2002, before finally bottoming in March 2003), this should be an attention-grabber. 

The iShares Russell 1000 Growth ETF (IWF) trades at 29 times trailing 12-month earnings, while its counterpart, the iShares Russell 1000 Value ETF (IWD), sports a P/E ratio of 16 times. Regardless of how strong growth stocks have been performing of late, ignoring this historic value/growth disparity is increasingly dangerous. 

As an extra incentive, when the dot-com bubble burst in 2000 and started that three-year bear market, many value stocks actually appreciated in price for the first two years of that era. So, if history repeats itself, there is potentially a great opportunity setting up.  

Following are a few large cap value ETFs that may represent a place to start the hunt for ETFs to take advantage of a potential value stock revival. 

The Invesco Dynamic Large Cap Value ETF (PWV) is a $761 million fund that has an 18-year track record. It maintains a fairly concentrated 50-stock portfolio, in which financials, energy and healthcare make up about half the assets, and 15 stocks make up 50% of the ETF by mandate. 

PWV selects stocks by tracking an index, as the majority of ETFs do. However, it does so in its own unique way, deploying a proprietary process to select stocks using a set of 10 factors that aim to identify undervalued stocks with the greatest appreciation potential. 

The First Trust Large Cap Value AlphaDEX Fund (FTA) is another value ETF veteran, dating back to 2007. One advantage of researching ETFs that go back that far is that we can see how they did during the global financial crisis.  

Disastrous Environment

That said, just about any equity ETF that was fully invested in stocks from late 2007 through early 2009 will show significant losses, given the disastrous investment environment of that time. 

FTA screens down to its final portfolio by eliminating those with low liquidity, those deemed to be growth stocks, and other specific criteria. That produces an ETF with 189 stocks, emphasizing financials and utilities, which combine for nearly 40% of assets in this $1.2 billion  portfolio that trades at a skinny P/E multiple of 9 times trailing earnings. 

For those looking for an even lower P/E multiple, there’s the Invesco S&P 500 Enhanced Value ETF (SPVU), a $90 million ETF that checks in at a mere 8.3 times earnings. SPVU holds 100 stocks that survive a quantitative process that analyzes book-to-price ratio, earnings-to-price ratio and sales-to-price ratio.  

This often produces a small-cap-tilted, sector-concentrated portfolio. That is the case currently, with 35% of SPVU allocated to financial stocks, and another 15% to energy. 

They say beauty is in the eye of the beholder. When it comes to value investing, that may also be the case. And after a historic monthly loss to its growth counterpart, investors would be wise to devote added attention to the equity market’s value segment. 

Rob Isbitts was an investment advisor for 27 years before selling his practice to focus on ETF research and education. He is based in Weston, Florida. Contact him at  [email protected] and follow him on LinkedIn.