How To Wade Back Into Value Stocks

Broadly speaking, value stocks continue incurring pain compared to their growth counterparts and that pain is passed onto passive index funds because many of those benchmarks feature overweight exposure to the energy sector, among other reasons.

Value investing isn't dead, but it may require a refreshed view, one that could be provided by the iShares Edge MSCI USA Value Factor ETF VLUE. VLUE is home to 148 stocks “with value characteristics and relatively lower valuations, before fees and expenses,” according to iShares.

VLUE, which tracks the MSCI USA Enhanced Value Index, is trading modestly higher to start the year and does indeed offer a value proposition with a price-to-earnings ratio of just 13.25x.

Why It's Important

“The value factor has struggled for the better part of the past decade, not only underperforming other factors, but delivering negative returns,” BlackRock said in a recent note. “A look at the S&P 500 Growth and Value indexes shows that growth outpaced value by more than 80% over the 10 years ended Dec. 31, 2019. After this dismal run, some believe the investment opportunity in value looks more attractive than ever. Prices surely must go back up, they argue. Others have made the case for various ways to 'repair' value to improve its performance.”

One way VLUE can repair value for investors is at the sector, namely via a 24.85% weight to technology stocks, more than triple the weight to that sector than is found in the S&P 500 Value Index. VLUE also allocates just 3.85% of its weight to the energy sector compared to 7.06% in the S&P 500 Value benchmark.

What's Next

There are, however, lingering headwinds for value. Notably, just because the factor looks attractive (it does), that's not a guarantee price appreciation.

“In 2019, the value spread was fairly high,” notes BlackRock. “This may make value stocks appear attractively priced ― and some investors may be tempted to return to value in hopes those prices are primed to march back up.”

In fact, betting on value could be a bumpy ride this year, indicating investors may want to consider smaller exposures to the factor.

“Investors hopeful for higher returns from value stocks in 2020 may instead only see higher volatility. This may argue for a more diversified approach rather than heaping more eggs into the value basket,” according to facts.

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