A bearish stock market has hit equity funds of all kinds in recent weeks, but it hasn’t hit value funds as hard as growth funds.
The stock market continues to extend its losses from last week, with the
S&P 500 falling 3.2% on Monday. Growth-oriented stocks, many of which are highly valued and are betting on gains in the future rather than today, are bleeding even more. heavy technology
Nasdaq Composite it fell 4.3% on Monday and is already down more than 27% from its peak in November 2021.
Investors bracing for more stock pain may want to turn to cheaper corners of the market that have suffered the least, but not all value funds are created equal. Broadly speaking, large-cap value stocks have held up better than their small-cap brethren this year as investors bet larger companies will have more financial resources to better survive a potential downturn.
This is reflected in the performance of the $5.4 billion
Vanguard Mega Cap Value ETF (MGV), which owns 150 cheapest stocks with an average mega market cap of $158 billion. Top 10 holdings, including
Berkshire Hathaway (BRK.A),
United Health Group (UNH),
Johnson and Johnson (JNJ), and
JPMorgan Chase (JPM)—make up more than a quarter of the portfolio.
While the S&P 500 is down 16% year-to-date, the Vanguard Mega Cap Value ETF is only down 5%. The downside: These names aren’t much cheaper than the market now. The fund is currently trading at 15 times earnings, just shy of the S&P 500’s 18 times.
While small-cap value funds generally lagged their large-cap peers this year, the $161 million
iShares US Small Cap Value Factor ETF (SVAL) is an exception. Compared to him
iShares Russell 2000 Value ETF (IWN) which owns more than 1,400 names, SVAL owns only 250 small caps with outstanding value characteristics. Major holdings include
Simmons First National (SFNC),
CVR energy (CVI), and
The concentration means SVAL has a lower valuation than its peers: On average, the fund’s shares trade at 8.9 times earnings, compared to 10.7 times for IWN, according to Morningstar. During Monday’s sell-off, IWN fell almost 3.5%, while SVAL only declined 1.6%. Over the past month, SVAL has outperformed IWN by more than four percentage points.
Even within the same market cap universe, value funds can be very different depending on how they select and weight stocks.
iShares S&P 500 Value ETF (IVE) and
Invesco S&P 500 Pure Value ETF (RPV), for example, use the exact same value metrics to pick cheaper names in the S&P 500. But a closer look reveals that the latter has a much more selective and concentrated portfolio, while the former includes a smaller group. of stocks that could have both value and growth characteristics.
Another big difference: In the Invesco ETF, the cheaper the stock, the higher its portfolio weight, while the iShares fund weights its holdings by market capitalization. As a result, the two funds have generated very different returns this year: the IVE has plummeted 7.4%, while the RPV has made a gain of 0.8%. However, as the market continues to slide, the difference seems to have faded: during Monday’s sell-off, both funds fell 2.5%.
Another way to maximize profits and avoid losses is to monitor the price momentum of potential stock picks. The $59 million Invesco S&P 500 Value with Momentum (SPVM), for example, selects 200 stocks within the S&P 500 that have the lowest valuations, but only invests in the 50% of the group that saw the strongest bullish price movements in periods recent.
This trend-following strategy worked well at the beginning of the year: from January to March, the SPVM gained almost 5%, while the IVE lost 0.6%. But like the Pure Value ETF, the momentum-seeking seems to have lost its mojo in the second quarter: both SPVM and IVE are down nearly 7% in the past month. During Monday’s sell-off, SPVM suffered even more, down 3.4%.
As the momentum fizzled out, higher quality companies selling at attractive valuations could be a good place to hide. The $222 million
American Century STOXX US Quality Value ETF (VALQ), for example, analyzes and weights stocks not only based on valuations, but also on fundamental measures such as profitability, earnings quality and dividend growth. This can help avoid riskier bets that are cheap for a reason, or so-called “value traps.” The fund also pays a rich dividend yield of 3.2%. Over the past month, the fund has fallen 4%, while the IVE saw a much deeper loss of 6.7%.
Email Evie Liu at email@example.com