Another Growth Vs. Value ETF Tussle

A theme from 2017 highlighted time and again is the growth factor's trouncing of its value counterpart. As measured by the SPDR Portfolio S&P 500 Growth ETF SPYG and its value rival, the SPDR Portfolio S&P 500 Value ETF SPYV, growth topped value by nearly 1,200 basis points last year.

Growth outperforming value isn't a new theme. For the five years ended 2017, SPYG outpaced SPYV in four of those five years. That might be one reason why many market observers are backing the value factor in 2018.

“At the start of 2017, investors expected that value would continue its post-election rally and the year would be one ripe for value investing,” said State Street Global Advisors (SSgA). “After all, 2016 marked value’s best year of performance since the Great Financial Crisis. However, value has underperformed growth by 11 percent in 2017—giving back all of its outperformance from 2016.”

Sectors Matter

Regardless of the isolated factor, single-factor ETFs are rarely as diverse at the sector as traditional broad market funds. Growth ETFs, for example, are usually heavily allocated to the technology and consumer discretionary sectors while value funds are often overweight energy and financial services names.

“The top two overweighted sectors in the S&P 500 Value Index—energy and financials—rebounded strongly in 2016 against the backdrop of stabilizing oil prices and heightened expectations for inflation after the US presidential election,” said SSgA. “However, 2017's cool down of US inflation, range-bound oil prices and delays in reflationary fiscal policy, financials and energy lagged the 'growthier' segments of the market, like technology and health care.”

SPYG, the growth ETF, currently allocates 58 percent of its combined weight to technology and healthcare stocks. SPYV, the value fund, devotes 37 percent of its combined weight to financial services and energy names.

An Assist From Tax Reform

Tax reform could provide a meaningful impact for value ETFs. It's already done so for the financial services sector, but tax reform's impact on the energy sector can't be overlooked. Energy, which is highly capital-intensive, was one of the most highly taxed sectors in the U.S. prior to tax reform.

"Late in 2017, as tax reform took center stage on the legislative agenda, value stocks attempted a game of catch-up,” said SSgA. “This was led by financials, which tend to perform well in a reflationary environment that is marked by higher interest rates and inflation.”

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