Momentum and value are two different investment factors, but over the past few months, value has been accruing some momentum, delivering notable upside to investors that, in some cases, have been waiting for years for value stocks to bounce back.

What Happened

The iShares Edge MSCI USA Value Factor ETF (CBOE: VLUE) is one of the exchange-traded funds participating in the recent value resurgence. The $3.54 billion VLUE tracks the MSCI USA Enhanced Value Index, which extends beyond price-to-book and price-to-earnings ratios.

“The index is designed to represent the performance of securities that exhibit higher value characteristics relative to their peers within the corresponding GICS sector,” according to MSCI. “The value investment style characteristics for index construction are defined using three variables: Price-to-Book Value, Price-to-Forward Earnings and Enterprise Value-to-Cash flow from Operations.”

Why It's Important

Over the past three months, VLUE is up 6.9%, or twice as much as the S&P 500 over the same span, but value has been lagging growth for some time, causing some investors to question the structural integrity of value as investment thesis.

“Investors who share this view point to the price-to-book ratio (P/BV), a common fundamental metric used by traditional value strategies to identify undervalued companies,” said BlackRock in a recent note. “They highlight P/BV’s inability to account for things like brand value and invested R&D, causing it to underestimate a company’s worth.”

Factors, just like sectors and industries, move in cyclical fashion, meaning there are times when value be out of style and times when it outperforms.

“The value factor has tended to outperform during recovery periods and may lag during periods of economic slowdown due to the capital-intensive nature of many value-oriented companies,” according to BlackRock. “As such, we argue that the recent underperformance of the value factor is not due to a structural change, but instead is due to the current economic environment and the factor’s cyclical nature.”

What's Next

VLUE offers a more modern interpretation of value investing. The fund allocates over 23% of its weight to technology stocks, its largest sector weight, and the fund is underweight financials compared to the S&P 500 Value Index.

Another positive trait with VLUE is that it's combined energy, real estate and utilities exposure is relatively modest (about 11%), meaning the fund isn't heavily exposure to big debt burdens and asset-heavy models, characteristics that can weigh on value stocks.