For investors, it’s all been about one word: growth. Thanks to tech’s dominance and outperformance, a small handful of fast-growing stocks have taken the lead. This has been built upon the post-Great Recession and post-pandemic surges. Investors have certainly favored growth over the decade or so. This has been terrible news for value investors. Value stocks have continued to fall by the wayside, underperforming their faster moving sisters.
However, value may finally have the last laugh. And active ETFs are the way to play it.
Trends are emerging that support value stocks in the new year. Research suggests that active managers have the skill to boost performance in the category. For investors, the time to add active value ETFs could be now.
Market Leadership Has All Been Tech
To put it bluntly, the so-called ‘Magnificent Seven’ has been THE market this year. The grouping of Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, and Tesla has been the real reason for much of the broader stock market’s returns in 2024. Looking at the Russell 1000—which is a mixture of large- and mid-cap stocks—the Magnificent Seven made up about 25% of the index. The fact that investors have continued to go ga-ga for these stocks has them providing much of the market’s overall total returns.
Looking at the Russell 1000, the Seven have managed to contribute 40% of the index’s 21% return this year.
Digging in further and expanding our timeline, the trend of growth over value has cemented itself. Following the Great Recession and the years of a meandering economy, investors looking for gains found success in many tech stocks. Higher margins and strong cash flows sealed the deal. The pandemic and tech-focused trends like cloud computing, e-commerce, and work-from-home solutions exacerbated this fact further.
The result is that value managed to underperform growth by about 100 percentage points over the last decade.
A Big Shift
However, these days, a shift may be occurring. That’s the gist according to a new report by asset manager BlackRock. Value could be starting to have the last laugh.
For one thing, so-called market breadth is moving into value’s favor. The disparity of returns has enabled value to take the lead. Looking at the respective Russell 1000 Value and Russell 1000 growth indexes, the value cohort put up a 9.4% return for the third quarter. Growth? They managed just to return 3.2%. So far in the fourth quarter, value has continued to lead. 1
BlackRock suggests this shift is structural and has several causes.
Valuation is on. Value strategy is a ‘value’ right now, particularly when compared to growth. Looking at the two subindexes, growth stocks—driven by tech’s oversized weighting in the index—now are trading at a P/E of 32.8×. This is expensive even by growth stock terms and is well above the 15-year average of 25.0×. In fact, you’d have to go back to the dotcom days to find similar high P/Es for growth.
Value on the other hand can be had for a forward P/E of 18.5×. While not super cheap, it’s roughly in-line with its 15-year average of 18.1×. And when looking at how expensive growth is, value is certainly the value of the two.
Another way to tell that value is a value is that it is under-represented in the Russell 1000. At the end of September when BlackRock conducted its research, growth made up 32% of the Russell. Value only accounted for 8%. This 24% difference is well above the historical 15-year average of just a 7.4% difference. Just take a look at this chart and you can see the difference.
Source: BlackRock Advisor Center
According to BlackRock, many investors are now underweight value versus growth. And as the percentage reverts back to the mean, value stocks have a lot more upside and leadership potential.
Finally, economic uncertainty may be fueling the value rally and shift. The stubbornness of inflation to a more historically normalized rate, higher overall interest rates, and return to a higher neutral rate from the Fed are positives for value stocks.
With that, value may finally be here to stay.
Active ETFs to the Rescue
With the switch on and the trend toward value stocks firmly at hand, investors may want to tilt their portfolios. They can very easily buy an ETF that tracks the Russell 1000 Value or similar value index. But they may want to go active with their choice.
There’s evidence that active managers can and do make a real difference when it comes to value stock selection. Thanks to the wider pool of value stocks over growth, there are plenty of opportunities for managers to find true value, play market inefficiencies, and score excess returns.
Digging into the numbers, BlackRock shows more than half of active value managers have beaten the Russell 1000 Value Index over the last five years. This compares to just 8% of active growth managers. Moreover, the active value managers have significantly added alpha, averaging 4 basis points’ worth of excess annual returns during that time. In all, those active managers managed to produce an extra 172 basis points’ worth of excess returns over the last five years.
Active ETFs have only enhanced their outperformance. With tax advantages and lower costs, active ETFs can add additional alpha generation to the mix.
Active Value ETFs
These ETFs were selected based on their exposure to value strategies using active management. They are sorted by their one-year total return, which ranges from 4.7% to 23%. They have assets under management between $210M and $8.6B and have expenses of 0.15% to 0.44%. They are currently yielding between 1.6% and 2.4%.
| Ticker | Name | AUM | 1-year Total Ret (%) | Yield (%) | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|---|
| CGDV | Capital Group Dividend Value ETF | $3.8B | 23% | 2.2% | 0.33% | ETF | Yes |
| AVLV | Avantis U.S. Large-Cap Value ETF | $1.53B | 11.9% | 1.84% | 0.15% | ETF | Yes |
| DFUV | Dimensional US Marketwide Value ETF | $8.58B | 7.9% | 1.66% | 0.22% | ETF | Yes |
| JAVA | JPMorgan Active Value ETF | $583M | 7.3% | 1.61% | 0.44% | ETF | Yes |
| AVUV | Avantis U.S. Small-Cap Value ETF | $6.7B | 7.1% | 2% | 0.25% | ETF | Yes |
| DFLV | Dimensional US Large Cap Value ETF | $914M | 6.3% | 2.4% | 0.23% | ETF | Yes |
| DFAT | Dimensional U.S. Targeted Value ETF | $8.2B | 5.3% | 1.6% | 0.28% | ETF | Yes |
| FLV | American Century Focused Large Cap Value ETF | $211M | 4.7% | 1.9% | 0.42% | ETF | Yes |
In the end, the shift toward active from growth is on. Cheaper valuations, uncertainty, and reversion to the mean are all massive tailwinds propelling value stocks. For investors, overweighting value has plenty of benefits these days. And the way to do that is through active ETFs. Ultimately, better returns and potential for outperformance is there.
Bottom Line
For the last decade, it’s all been about growth. But now, the shift toward value is at hand. Active ETFs can be used to unlock the most from shift, offering outperformance, low costs, and a bigger opportunity set. Investors shouldn’t ignore the trend.
1 BlackRock (November 2024). Why Now May Be An Opportune Time For Active Value?
