Why Value ETFs May Outdo Growth For The Rest Of 2022

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Red-hot inflation and the resultant faster Fed rate hikes have made value investing a darling in 2022. Value stocks have a low price-to-book ratio (P/B)— a measure of the market cap relative to tangible assets, per a Wall Street Journal article.

The lower the price-to-book ratio, the higher the value. This makes them a gem-like bet amid economic uncertainties. Plus, most value ETFs are financial sector-heavy and perform better in a rising rate environment.

The MLIV Pulse survey revealed that 1,087 global responses from retail investors, portfolio managers, and strategists show an inclination toward value investing for the rest of this year, as quoted on a Bloomberg article.

As much as 74% of MLIV readers say stocks that look cheap relative to valuation fundamentals are set to outperform their growth counterparts for the rest of 2022. Value investing has largely underperformed since 2007 judging by the S&P 500 Index as growth-based tech stocks flexed muscles.

Why Value?

Anemic growth in developed economies, the QE scenario, and muted bond yields have kept value investing subdued in the past decade and boosted growth stocks. But the scenario is changing now. Since the growth sector relies on easy borrowing for superior growth and its value depends heavily on future earnings, a rise in long-term yields cuts the present value of companies’ future earnings.

And this is where value investing rises. Value stocks perform better in a rising rate environment. Moreover, during the peak of the pandemic, value stocks were hit hard. With economic reopening gaining traction, now is the time for them to flourish on beaten-down valuation.

Investors should note that SPDR Portfolio S&P 500 Growth ETF (SPYG - Free Report) is down 17.3% this year, while SPDR Portfolio S&P 500 Value ETF (SPYV - Free Report) is up 0.1% (as of Apr 22, 2022) versus a 7.8% decline in the S&P 500 ETF (SPY - Free Report).

This has shown that the scale of the rotation to cheap “value” stocks from trendy “momentum” names has been prevalent. The most popular section for MLIV’s bulls is the S&P 500 Value index, garnering 40% of votes, followed by energy and bank stocks, the Bloomberg article noted. Retail investors favoring value investing were the largest single category of survey respondents, making up 42%, followed by portfolio managers at 23%.

Against this backdrop, investors can play the below-mentioned ETFs as long as the trend is their friend.

ETF Picks

Invesco S&P 500 Enhanced Value ETF (SPVU - Free Report)

The underlying S&P 500 Enhanced Value Index tracks the performance of stocks in the S&P 500 Index that have the highest value score. SPVU charges 13 bps in fees and yields 2.29% annually. Financials (38.38%), Healthcare (19.01%), and Materials (9.26%) are the top three sectors of the fund.

Financial Select Sector SPDR ETF (XLF - Free Report)

The underlying Financial Select Sector Index seeks to provide an effective representation of the financial sector of the S&P 500 Index. The XLF ETF charges 10 bps in fees and yields 1.76% annually.

SPDR Portfolio S&P 500 High Dividend ETF (SPYD - Free Report)

The underlying S&P 500 High Dividend Index is designed to measure the performance of the top 80 dividend-paying securities listed on the S&P 500 Index, based on dividend yield. SPYD charges 7 bps in fees and yields as high as 3.55% annually. Utilities, Financials, Energy, Real Estate, Consumer Staples, and Healthcare have a double-digit weight in the fund.

iShares U.S. Energy ETF (IYE - Free Report)

The underlying Russell 1000 Energy RIC 22.5/45 Capped Gross Index measures the performance of the energy sector of the U.S. equity market. The fund charges 41 bps in fees and yields 2.74% annually.

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