How To Play Stock Rotation With Value ETFs

The latest rally in the U.S. stock market powered by global easing policies has led to stock market rotation from the high-valuation growth stocks to more steady companies with lower valuations. This is evident from the iShares Edge MSCI USA Value Factor ETF (VLUE - Free Report) improvement of 7.7% so far this month against a loss of 1.2% for iShares Edge MSCI USA Momentum Factor ETF (MTUM - Free Report).

According to Bespoke Group, this indicates that investors are anticipating a rise in rates. Analysts are of the opinion that interest rates have bottomed for now as sentiments regarding the trade tensions have improved. Notably, the 2-year and 10-year U.S. Treasury yields rose to six-week high while 30-year bond yield advanced to a five-week high.

The shift from growth stocks toward value investing also highlights an anticipation of a downturn in the stock market. It signals investor concerns regarding a downturn, even as the major bourses are just within the striking distance of its recent peak. This is because if interest rates rise after hitting the bottom, it will hurt high growth stocks with high P/E ratios by diminishing the future value of earnings and rising borrowing costs.

Per portfolio manager at Lazard Asset Management, value stocks have not been this cheap since 1999. Its relative valuation has hit record lows of late, to the point that some mean reversion was likely. Despite the positive development on trade front, the United States and China are still slated to levy duties on each other’s goods in the coming weeks in phases. Increased tariffs will continue to weigh on global growth and thus raised the appeal for value stocks.

Further, value stocks by definition are undervalued and have low price-to-earnings or price-to-book value ratio. These stocks might see their price rise when market rallies.

How to Play?

Investors seeking to participate in this market transformation, which J.P. Morgan called a “once in a decade opportunity,” could consider the ETFs that gained most over the past week. We have highlighted the five top-performing value ETFs that are at the forefront of the current stock rotation and are not confined to a particular sector or an industry:

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Disclosure: contains statements and statistics that have been obtained from sources believed to be reliable but are not guaranteed as to accuracy or completeness. References to any specific ...

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