As investors approach the half-way mark for 2017, value stocks have been one of the most disappointing equity risk factors in a risk-on environment.
Compared to other smart beta funds, value has lagged behind so far this year. The $2 billion iShares Edge MSCI USA Value Factor ETF (VLUE) and the $12 billion iShares S&P 500 Value ETF (IVE) are up more than 5% each in USD terms year-to-date.
Other value factor ETFs are performing in line with the two above ETFs, but few are doing better. As investors adopt a riskier attitude, value stocks – companies that have depressed valuations – are less appealing and investors instead turn to cyclical sectors like industrial and information technology stocks.
More value-focused sectors are struggling, too. Energy, a large component of value ETFs, is the worst performing of the 11 sectors in the S&P 500 Index so far in 2017. (IVE holds more than 10% of its fund in energy stocks, and VLUE has just over 6% in the same sector.)
Financial services stocks have provided another hurdle for value ETFs – the sector makes up more than 26% in IVE, double the allocation of healthcare stocks, the second largest exposure in the fund. Energy has been the second worst performing sector of the bellwether S&P 500 between January and June.
Upcoming risks for value stocks
“We see an unexpected economic regime change as the major risk to value,” said BlackRock in a research note, adding that the economic regime was “the biggest driver of factor performance”.
“Lower growth and inflation would weaken the fundamental outlook for cheaper stocks. Factor tilting, rather than short-term in-and-out timing, can help balance opportunities with the aim to improve returns without disrupting the long-term benefits of a diversified factor portfolio, in our view.”
For investors that want to stick with value stocks, however, it is worth noting that the two main funds express value in different ways. VLUE has a large weight – 22% – in technology stocks, three times as much as competing IVE, holding mega-caps such as Apple. VLUE costs 0.15% in fees and IVE costs 0.18%.