(ETF Trends) -- There has been plenty of speculation regarding when value stocks will finally start outperforming growth names in earnest. Much of that chatter is attributable to growth’s lengthy out-performance of value.
For nearly the entirety of the recent U.S. bull market, growth stocks and ETFs have bested their value rivals.
While 2019 is still in its nascent stages, signs indicate value is on the mend. Year-to-date, the SPDR Portfolio S&P 500 Value ETF is beating both its growth counterpart and the S&P 500.
SPYV’s underlying index “contains stocks that exhibit the strongest value characteristics based on: book value to price ratio; earnings to price ratio; and sales to price ratio,” according to State Street.
It is not uncommon for value, or any factor for that matter, to under-perform for certain periods of time, but the length of value’s current laggard status is unusual.
“The last ten years have been a difficult time for value investors with a marked period of underperformance—in fact, an unusually extended period,” said State Street in a recent note.
“This can be due to a number of reasons, but key among them has been the unusual level of monetary accommodation provided by low rates and quantitative easing (QE). This has driven risk seeking behavior by investors at the cost of fundamentals that normally provide a catalyst for value stocks.”
What’s Next for SPYV
SPYV holds 383 stocks. Like many value strategies, the fund is heavily allocated to financial services with a weight to that sector of 22.17%. What may surprise some investors is that SPYV’s second-largest sector is weight is a 15.09% allocation to technology.
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Despite the increased Congressional scrutiny, companies still increased share repurchases over Q1, potentially bolstering a smart beta ETF strategy that specifically targets companies with a history of stock buybacks.
Some project that buybacks are on their way to another record this year, potentially outdoing the over $1 trillion seen in 2018, CNBC reports.
Company buybacks are under the microscope on Capitol Hill as both Republicans and Democrats censured buyback practices, arguing that corporate America is receiving an unfair advantage in the tax code that rewards the behavior instead of reinvesting back into workers and equipment.
“To me, this poor income distribution and the ensuing and uncharacteristic lack of hope it creates in the American working class is — along with climate change — the greatest problem America faces,” New York Democratic Sen. Charles Schumer said. “We need solutions, not glib answers.”
Nevertheless, corporate American continued on their share repurchases plans. According to Bank of America Merrill Lynch, repurchases are up 91% year-over-year, with staples and materials leading the charge followed by tech and financials. Over the past week, there was nearly $2.8 billion in deals, the fourth-highest level since BofAML began tracking the data point in 2009.
“The current pace of buybacks would suggest a record year in [staples and materials]plus Financials and Utilities; Industrials and Discretionary buybacks, while below post -2009 records, are also set to eclipse last year’s levels,” Jill Carey Hall, U.S. equity strategist at BofAML, said in a note.
Howard Silverblatt, senior industry analyst at S&P Dow Jones Indices, pointed out that S&P 500 companies that have reported Q4 results are showing just a 1% dip in share repurchases from the record third-quarter buyback levels, with the amount 64.8% ahead of the fourth quarter in the year prior.
As more companies look to add value through share repurchases, ETF investors can also capitalize on the potential opportunity through buyback-themed ETF strategies.
For instance, ETF investors who believe in a rise in share repurchases can look to ETFs that specifically target companies that implement buyback schemes, including the Invesco Buyback Achievers ETF, the SPDR S&P 500 Buyback ETF and iShares U.S. Dividend and Buyback ETF.
PKW includes a broader selection of U.S. companies that have effected a net reduction in shares outstanding by 5% or more in the trailing 12 months.
SPYB focuses on S&P 500 companies with the highest buyback ratio in the past 12 months. DIVB is comprised of U.S. stocks with a history of dividend payments and or share buybacks where holdings include those with the largest dividend and buyback programs in the market measured by dollar value.
