Value ETFs Get A Trump Boost

The value factor is experiencing a renaissance of sorts this year, and that theme, as it pertains to exchange-traded funds, has been amplified in the weeks following last month's U.S. presidential election.

That is right. Love him or hate him, President-elect Donald Trump seems to be having a positive impact on value ETFs, such as the Vanguard Value ETF VTV and the iShares Russell 1000 Value Index (ETF) IWD. During the halcyon days of the current bull market, value was not the place to be as investors favored growth and momentum fare.

That script has been flipped in 2016. Flows data for exchange-traded funds based on the value factor confirm as much. Investors should consider boosting exposure to the value factor now before it gets too hot and they chase value when it is no longer offering, well, value.

The Complicated Nature Of Value

“Value has been the dominant fundamental investment strategy of the year so far and the trend has only gathered pace in the wake of the recent US election, which has disproportionally benefited value shares. The largest value ETF, the iShares Russell 1000 Value ETF (IWD), whose year to date (ytd) returns were 2.5 percent ahead of the wider Russell 1000 universe the eve of the election, has gone on to double its outperformance since the November 8th vote,” said Markit in a recent note.

Performance Post-Election Day

Since November 9, the first trading session after Election Day, IWD and VTV are up an average of 6.8 percent, easily topping the 4.7 percent returned by the S&P 500 over that period. Investors have widely embraced this pair of ETFs since Trump's victory with VTV adding more than $1.1 billion in new assets while IWD has seen inflows of nearly $878 million.

IWD And VTV

Like many value ETFs, IWD is heavily allocated to financial services and energy stocks with those two sectors combining for over 40 percent of the ETF's weight. IWD's next five sector allocations combine for about 41 percent of its weight.

VTV devotes over a third of its weight to financial services and energy names. Surging value ETFs are also keeping short sellers at bay.

“However short sellers, arguably the most contrarian of investors, haven’t shown any appetite to short value investing’s recent strong run. If anything, the shorting activity has declined materially in these high flying shares as evidenced by the fact that the average demand to borrow shares in the constituents of the IWD ETF has sunk fallen by 5 percent in the month since the election. This most recent bout of short covering takes the average shorting activity across this group of shares to the lowest level in 15 months,” added Markit.