Value ETFs' Appeal Jumps After Growth Funds' Big Year
Growth-heavy SPY outflows reach $18 billion in January.
The strength of the equity markets that carried over from last year has been spotlighting value versus growth stocks for investors and advisors ready to pocket some gains.
“We've shifted some allocation to value from growth, and there is good data behind that,” said Jason Siperstein, president at Eliot Rose Wealth Management, a financial planning and investment management firm in West Warwick, R.I.
“But it's never a clear-cut choice, because the market is full of nuances,” he added. “That's why we haven't completely ditched growth investments.”
Tom Graff, head of investments at financial planning firm Facet in Baltimore, attributed the recent interest among investors in value-oriented stocks to the increasing likelihood of a “soft landing” for the economy.
“Some investors are probably thinking they are under-weight more cyclical parts of the market, which tend to line up with value-style stocks,” he said. “A lot of portfolios became naturally underweight value given how much growth outperformed in 2023.”
Outflows from the $486 billion SPDR S&P 500 ETF Trust (SPY), which gained more than 26% last year, have reached more than $27 billion in January, reflecting a general shift away from strong growth stocks that have carried market-cap weighted indexes.
Meanwhile, inflows to the $27 billion iShares S&P 500 Value ETF (IVE), which gained 22% last year, have hit more than $2.8 billion in January.
Growth Stock ETFs Big Outflows
Cyrus Amini, chief investment officer at investment advisor Helium Advisors in Everett, Wash., said the runup for growth stocks last year placed a lot of valuations in “overbought territory” relative to value stocks.
“Given the broad expectation of slower economic growth in 2024, things look poised for value to narrow the gap between growth and value,” he said. “Value stocks trade at a more reasonable valuation, and have a larger dividend yield, offering both income and some margin of safety if the economy does indeed slow down.”
Super 7 and All Else
Stephen Kolano, chief investment officer at financial advisor Integrated Partners in Waltham, Mass., summed it up as a the “Super Seven and everything else,” in a reference to the short list of high performers that have been carrying the performance of the broad market indexes for more than a year.
“Currently, the top 10 stocks in the S&P 500, represent over 32% of the weight of the S&P 500; the most concentrated the index has been since the mid-1990s and as a result the core index in and of itself represents a tilt towards growth,” he said. “Essentially, it becomes a when-not-if scenario for value stocks as opposed to if-not-when that was in place through all of 2022 and most of 2023.”
For Brian Frank, portfolio manager at mutual fund trust Frank Capital Partners in Miami, the trend toward value investing is just basic math.
“We have clients calling us up and talking about wanting to get defensive, and you can definitely make a case for it,” he said.
Frank added that a migration toward defensive sectors is made easier by the uncharacteristically low valuations.
“Usually defense is expensive, but it’s cheap right now,” he said. “I will hold cash if I’m not finding value, but I’m finding value in value stocks right now.”
Contact Jeff Benjamin at [email protected] and find him on X at @BenjiWriter
