The Spotlight Blog

Growth Stocks Pricey. Is This Value’s Moment?

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What We’ve Seen

  • As recently as March, investors were still allocating to value stocks in the face of long-term underperformance, but lately that course has reversed.
  • Over the last 5 and 10 years, the differences in performance between growth stocks and cyclical stocks have been an annualized 19 basis points and 6 basis points, respectively, as both have benefited from significant momentum.
  • Since mid-March, the outperformance of cyclicals relative to defensives and growth relative to value has accelerated year-to-date.
  • While growth is outperforming value by a notable 5.41%, cyclicals are leaving defensives completely behind, outperforming to the tune of 12.05% due to the strong performance in information technology names and the healthcare category performing so poorly on a relative basis.

Relative Performance of Growth-over-Value has Lagged Behind Cyclicals-over-Defensives

Source: FTSE Russell, MSCI, as of May 7, 2019. Past performance is not indicative of future results. One cannot invest directly in an index.

Money in Motion

  • For the better part of the last year, investors favored value ETFs at the expense of growth ETFs. Now, with the continued underperformance of value stocks, investors are seemingly giving up on value. While longer-term (trailing 2-Year and 3-Year) flows and positioning still point to value, growth ETFs (based on 13 ETFs with over $140B in assets under management) have seen $5.1B more in relative flows than value ETFs (13 ETFs with over $125B in assets under management) over the course of 2019. In fact, rolling 3-month flows between growth and value ETFs have been in the 90th percentile. Relative flows were at their lowest percentile in mid-December 2018. This is a trend that investors should continue to keep an eye on.
  • In dollar terms, since the start of the second quarter, growth ETFs have taken in $1.65 billion in inflows, while value ETFs have seen $144.7 million in outflows. Over that time period, growth stocks have outperformed their value counterparts by 1.02%. With the year-to-date performance spread sitting at 5.41% in growth’s favor, it’s important to note that calendar year 2019 has yet to see a single month in which flows into value have outpaced flows into growth.

Flows into Growth ETFs are Now Dominating Value ETFs

Source: Bloomberg Finance, L.P., as of May 7, 2019. Data represents the daily percentile rank over the last 12-months of rolling 3-month flows of U.S.-listed U.S. Large Cap Growth ETFs and U.S. Large Cap Value ETFs specifically targeting exposure to U.S. Large Cap Growth and Value stocks, respectively.

What’s Next?

  • With 82% of companies in the Russell 1000 Index having reported, the Q1 2019 earnings picture is mostly formed. While aggregate growth on both the top and bottom lines has been uninspiring, there have been some upside surprises over the course of the last few weeks. In other words, Q1 2019 earnings season has not brought on the type of volatility that perhaps many market participants were expecting.
  • Trade rhetoric, the looming tariff increase on Chinese imports (from 10% to 25% on $200B worth of goods), the potential retaliation, and the unsettled trade negotiations are the main macro drivers for markets for the short term. Domestic equity markets have already been met with an uptick in volatility as everyone awaits the arrival of Chinese Vice-Premier Liu He.
  • Investors should keep an eye on the results from the two-day trip, but remain focused on the trend lines, not the headlines.

Earnings Surprise has… Surprised

Sector Growth / Value Tilt Growth Surprise
Communication Services Growth 16.30% 10.72%
Consumer Discretionary Growth 8.44% 18.87%
Consumer Staples Value 5.35% 7.08%
Energy Value -25.10% 1.02%
Financials Value 2.94% 4.02%
Health Care Value 8.70% 5.94%
Industrials Growth 3.13% 3.51%
Information Technology Growth -4.69% 5.62%
Materials Value -16.25% 9.24%
Real Estate Value 5.36% 1.26%
Utilities Value 4.02% 0.99%
Russell 1000 2.17% 5.89%

Source: Bloomberg Finance, L.P., as of May 7, 2019. 

Implementation Ideas

  • With information technology and consumer discretionary stocks comprising over 55% of the portfolio, the Direxion Russell 1000® Growth Over Value ETF [RWGV] offers investors the ability to gain increased access to sectors experiencing levels of growth that are above the average for the broader market.
  • The Direxion Russell 1000® Value Over Growth [RWVG] creates an opportunity for an amplified exposure to value stocks relative to growth names like Apple Inc., Microsoft Corporation, Amazon.com, Inc., Facebook Inc., and Alphabet Inc. all having negative positions in the portfolio.

 


Definitions

  • Russell 1000® Index: The Russell 1000 Index is an index of approximately 1,000 of the largest companies in the U.S. equity market.
  • Russell 1000® Growth Index: The Russell 1000 Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.
  • Russell 1000® Value Index: The Russell 1000 Value Index measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values.
  • MSCI USA Cyclical Sectors Index: The MSCI USA Cyclical Sectors Index is based on MSCI USA Index, its parent index and captures large and mid-cap segments of the US market. The index is designed to reflect the performance of the opportunity set of global cyclical companies across various GICS® sectors. All constituent securities from Consumer Discretionary, Financials, Industrials, Information Technology and Materials are included in the Index.
  • MSCI USA Defensive Sectors Index: The MSCI USA Defensive Sectors Index is based on MSCI USA Index, its parent index and captures large and mid-cap segments of the US market. The index is designed to reflect the performance of the opportunity set of global defensive companies across various GICS® sectors. All constituent  securities from Consumer Staples, Energy, Healthcare, Telecommunication Services and Utilities are included in the Index.

Relative Weight ETF Risks: Investing involves risk including possible loss of principal. The Funds’ investments in derivatives may pose risks in addition to, and greater than, those associated with directly investing in or shorting securities or other investments. Investing in, and/or having exposure to, growth and value securities involves risks.  Risks of growth securities include the risk of sharp price movement, and susceptibility to increased volatility, which may cause them to perform differently than the market as a whole. Risks of value securities include the risk that their intrinsic value may never be fully realized by the market. There is no guarantee that the returns on the Funds’ long or short positions will produce high, or even positive returns and a Fund could lose money if either or both of the Fund’s long and short positions produce negative returns.  Please see the summary and full prospectuses for a more complete description of these and other risks of the Funds.

Distributor: Foreside Fund Services, LLC