A bearish stock market has clobbered equity funds of all stripes in recent weeks, but it hasn’t hit value funds as hard as growth funds.
The stock market continues to expand its losses from last week, with the
S&P 500 tumbling 3.2% on Monday. Growth-oriented stocks—many of which are richly valued and bet on earnings in the future instead of today—are bleeding even more. The tech-heavy
Nasdaq Composite tumbled 4.3% on Monday, and is already down more than 27% from its peak in November 2021.
Investors bracing for further pain in stocks might want to turn to the cheaper corners of the market that have suffered less, but not all value funds are created the same. Generally speaking, large-cap value stocks have held up better than their small-cap brethren this year, as investors bet that larger firms will have more financial resources to better survive a potential recession.
This is reflected in the performance of the $5.4 billion
Vanguard Mega Cap Value ETF (MGV), which holds 150 cheaper stocks with a mega average market cap of $158 billion. The top 10 holdings—including
Berkshire Hathaway (BRK.A),
UnitedHealth Group (UNH),
Johnson & Johnson (JNJ), and
JPMorgan Chase (JPM)—make up more than a quarter of the portfolio.
While the S&P 500 is down by 16% year to date, the Vanguard Mega Cap Value ETF only lost 5%. The downside: These names aren’t that much cheaper than the market now. The fund currently trades at 15 times earnings, just slightly lower than the S&P 500’s 18 times.
While small-cap value funds generally lagged behind their large-cap peers this year, the $161 million
iShares US Small Cap Value Factor ETF (SVAL) is an exception. Compared with the
iShares Russell 2000 Value ETF (IWN) that owns more than 1,400 names, SVAL holds just 250 small-cap companies with prominent value characteristics. Top holdings include
Simmons First National (SFNC),
CVR Energy (CVI), and
The concentration means SVAL has lower valuation than its peers: On average, stocks in the fund trades at 8.9 times earnings, compared with IWN’s 10.7 times, according to Morningstar. During Monday’s selloff, IWN dropped nearly 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 weigh 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 first includes a larger group of stocks that might have both value and growth characteristics.
Another big difference: In the Invesco ETF, the cheaper the stock, the heavier its portfolio weight, while the iShares fund weighs its holdings by market caps. As a result, the two funds have generated very different returns this year: IVE has tumbled 7.4%, while RPV checked out a gain of 0.8%. As the market continues to fall, however, the difference seems to have faded: During Monday’s selloff, both funds dropped 2.5%.
Another way to maximize gains and avoid losses is by monitoring 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 cheapest valuations, but only invests in 50% of the group that saw stronger upward price movements in recent periods.
This trend-following strategy worked well in the beginning of the year: From January to March, SPVM gained nearly 5%, while IVE lost 0.6%. But similar to the Pure Value ETF, momentum-chasing seems to have lost its mojo in the second quarter: Both SPVM and IVE tumbled nearly 7% in the past month. During Monday’s selloff, SPVM even suffered more, down by 3.4%.
As momentum stopped working, higher-quality companies selling at attractive valuations might be a good place to hide. The $222 million
American Century STOXX US Quality Value ETF (VALQ), for example, screens and weighs stocks not only based on valuations, but also fundamental measures like profitability, earnings quality and dividend growth. This can help avoid the riskier bets that are cheap for a reason, or the 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%.
Write to Evie Liu at [email protected]