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After about a decade of growth stocks tearing up the charts, the value style of investing is having its day.
More than $18 billion this year — already a quarterly record — has gone into about 80 different exchange-traded funds that focus on companies considered undervalued relative to their assets, like banks.
If money keeps shifting this way from high-flying stocks like tech, what’s been unthinkable for many years could actually happen: A “deep-value” exchange-traded fund could displace the Tesla-fueled ARK Innovation ETF (ARKK) as the next niche ETF to hoover up investor money, according to an analysis by Bloomberg Intelligence.
Money Is Pouring Into Value-Oriented ETFs
Source: Bloomberg
Over the past year, Cathie Wood and her actively managed ARK Innovation ETF have become the darling of Wall Street after making big bets on innovative companies with disruptive technologies. Its largest holdings are Tesla Inc. (10.5%), Square Inc. (6.5%) and Teladoc Health Inc. (5.9%). Toward the end of last year, hundreds of millions of dollars a week were pouring into her funds, betting on “growth” stocks, or a wager that certain industries and companies are future leaders. Some $38 billion has flowed into ARK funds since the market bottom in March 2020, according to Bloomberg Intelligence.
On the other hand, typically, value investing isn’t seen as sexy. These companies — think manufacturers of industrial goods and financial services companies — don’t get rocketship emojis next to their ticker symbols. But the prospect of rising interest rates makes the stratospheric prices of many tech stocks harder to justify and has let some air out of the growth sector.
Value stocks are typically more economically sensitive than shares of hot growth companies, so are seen as a post-pandemic trade as a $1.9 trillion spending bill helps the economy, vaccination rates for Covid-19 rise and parts of the U.S. business world reopen.
On the far end of this spectrum is “deep value” investing — stocks that may be even more undervalued than the ones mainstream value funds would buy, based on the value of the company compared with its assets. The stocks in deep-value ETFs also tend to be far smaller companies.
To see how wide the gulf between deep value and traditional value ETFs can be, look at the more than $72 billion Vanguard Value ETF (VTV). The index the ETF tracks is made up of 330 stocks, with JPMorgan Chase & Co. being given the highest weight, at 3%. The median market capitalization of stocks the ETF tracks is just under $110 billion, so it holds a lot of well-known, mega-cap stocks, the Bloomberg Intelligence analysis shows.
It’s a very different picture at the $38 million iShares Focused Value Factor ETF (FOVL). The deep value fund tracks an index of just 40 or so stocks and has chemical and ammunitions maker Olin Corp. — not exactly a household name — as its top stock, at 4.7%. The median market-cap in the ETF? A comparatively small $9.1 billion.
Read More: Value Stocks a Week Away From ‘Holy Grail’ Momentum Boost
What’s needed to spark ARK Innovation-like momentum-chasing into deep value ETFs is, of course, high returns that tower over the funds’ growth counterparts and their more mainstream value peers. And that’s exactly what’s been happening this year for some of the most highly concentrated deep value ETFs.
Value Funds are Outperforming Growth Peers
Source: Bloomberg. Performance figures are quarterly, and as of Mar. 17 for Q1, 2021.
The iShares Focused Value Factor, for example, has a 26.8% gain for the year as of the Wednesday close, and the $40.1 million Roundhill Acquirers Deep Value ETF (DEEP) is up more than 25%. The Vanguard Value ETF is up 10.4%, and the iShares Russell 1000 Value ETF (IWD) has gained 11.1%.
The Vanguard Growth ETF (VUG), meanwhile, is up 1.9% for the year, and the iShares S&P 500 Growth ETF (IVW) has gained 1.7%.
As that comparison shows, value funds can have very different styles, which can lead to big performance gaps over 12-month periods. The gap between the best- and worst-performing value ETFs has averaged 16 percentage points since 2006, peaking at 94 points during the financial crisis.
“Some of the deep value ETFs are kind of like lottery tickets,” Bloomberg Intelligence ETF analyst Eric Balchunas said. “If it works, the funds could hit the jackpot.”
The big question, though, is whether this is truly a shift from growth investing into value, or just a blip of outperformance.
“Value has had so many head fakes over the years that no one really believes the outperformance will last,” Balchunas said. There may need to be six months of trouncing growth ETFs before there’s a mass psychological shift toward some of the niche value ETFs, he figures.
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March 18, 2021 at 07:00PM
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Value ETFs (DEEP) (FOVL) Could Eclipse Growth Funds Like Cathie Wood's ARKK - Bloomberg
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