For decades, owning value stocks has been viewed as the discipline of curmudgeons, chicken littles who claim that everything is too expensive and that regression to the mean is coming — sinking the overhyped and elevating the misunderstood.
Despite years of underperformance, value exchange-traded funds have been stalwart asset gatherers. Now, with the return of market turbulence, value stocks are winning the day.
For the 12 months ended Feb. 17, U.S.-focused value ETFs have steadily outpaced growth, returning about 15% or more, including reinvested dividends, according to FactSet Research Systems Inc. Growth products have experienced single digit to negative returns over the same period, but still sport five-year returns beyond the grasp of value strategies.
Those returns helped push growth ETFs to $352 billion in assets, according to FactSet, despite being significantly outpaced in net flows over the past few years. U.S. value ETFs currently hold $366 billion in assets, taking in $93 billion over the last three years, compared to growth ETF net flows of $15 billion.
"The shift from growth to value ETFs is a trend that many investors have been anticipating for years given the prior multiyear stretch of growth outperformance," said Ryan Barksdale, head of adviser portfolio analytics and consulting at Vanguard Group in Malvern, Pa.
Some of the shift to value is due to rebalancing trades or shorter-term valuation-based trades, Mr. Barksdale said. He added that Vanguard is also seeing some investment advisers expressing "a strategic belief that we're early in the value cycle based on longer-term expectations." In fact, recent research from Vanguard's investment strategy group expects "value stocks to outperform by as much as the historical equity risk premium over the next decade, primarily because of a decay in the overvaluation of growth stocks," Mr. Barksdale said.