After years of lagging growth, the value factor needs more than just one month of out-performance to cement a comeback, but July could provide proof large-cap value stocks are on the mend against their growth counterparts.
Last month, the S&P 500 Growth Index and the S&P 500 Value Index returned 3.44% and 4.05%, respectively.1 Stocks are designated as value plays when market participants view the shares as attractively valued relative to earnings growth, value of assets or intrinsic value.
Historically, value stocks have outperformed their growth rivals over long holding periods, making value’s laggard status in the current bull market for U.S. equities something of an anomaly. From the start of the current U.S. bull market on March 10, 2009 through July 31, 2018, the Russell 1000 Growth Index returned about 426% compared to “just” 377.60% for the Russell 1000 Value Index. That is unusual because from mid-1927 through the end of 2014, the annualized return for value stocks, as measured by the Fama/French U.S. Large Value Index, was 11.94% compared to 9.50% for the Fama/French U.S. Large Growth Index.
Sector attribution goes a long way toward explaining value’s laggard status in the current bull market. Growth has been propelled higher by the technology and consumer discretionary sectors. As of Aug. 9th, 2018, those sectors combined for 59.57% of the Russell 1000 Growth Index, but the Russell 1000 Value Index’s combined exposure to tech and consumer cyclicals was just 18.01%.
An area of potential vulnerability for large-cap growth is the FAANG quintet – Facebook Inc. (FB), Amazon.com Inc. (AMZN), Apple Inc. (AAPL), Netflix, Inc. (NFLX) and Google parent Alphabet Inc. (GOOGL). Those stocks combine for 22.10% of the Russell 1000 Growth Index, indicating the index could be tested by FAANGs retrenchment. Predictably, other sectors drive value’s performance.
“Industrial, financial and health-care companies led stock-market gains in July as interest rates rose and data showed the economy growing at the fastest pace in nearly four years,” according to the Wall Street Journal. “Firms in those sectors have significantly lower valuations than the crowded technology sector and tend to pay higher dividends, making them attractive to investors looking to diversify away from tech-heavy portfolios.”23
The S-Network Sector Dividend Dogs Index equally weights 10 of the GICS sectors, offering a combined weight of 30.96% to the energy, industrial and financial services sector at the end of the first quarter. That benchmark has a trailing 12-month dividend yield of 3.41%, or about 125 basis points higher than the yield on the Russell 1000 Value Index.
Value In Rising Rates
Yes, large-cap value stocks staged a comeback in July and, no, interest rates did not rise last month. Still, the July value resurgence could be a sign that investors are bracing for more rate hikes before the end of 2018. Fixed income market observers widely expect the Federal Reserve to boost interest rates at its September and December meetings.
Consider this: from 2002-2006, a period of Fed tightening, unspectacular economic growth and investors’ reluctance to embrace tech, value stocks outperformed growth.34
Historically, financial services and energy are among the better-performing sectors in rising rate environments. Those groups combine for 34.30% of the Russell 1000 Value Index.
A Valuable Value Idea
The ALPS Sector Dividend Dogs ETF (SDOG) is an income-generating fund with a value profile. SDOG follows the S-Network Sector Dividend Dogs Index and equally weights 10 GICS sectors at 10% apiece and individual holdings at 2% apiece. Over the past three years, the fund has outperformed the Russell 1000 Value Index, including dividends paid, by 690 basis points.
Important Disclosures & Definitions
An investor should consider the investment objectives, risks, charges and expenses carefully before investing. To obtain a prospectus which contain this and other information call 866.675.2639 or visit www.alpsfunds.com. Read the prospectus carefully before investing.
Standardized performance for the ALPS Sector Dividend Dogs ETF (SDOG) can be found here. Current holdings for SDOG can be found here.
ALPS Sector Dividend Dogs ETF Shares are not individually redeemable. Investors buy and sell shares of the ALPS Sector Dividend Dogs ETF on a secondary market. Only market makers or “authorized participants” may trade directly with the Fund, typically in blocks of 50,000 shares.
There are risks involved with investing in ETFs including the loss of money. Additional information regarding the risks of this investment is available in the prospectus.
The Fund is subject to the additional risks associated with concentrating its investments in companies in the market sector.
Diversification does not eliminate the risk of experiencing investment losses.
An investor cannot invest directly in an index.
The S-Network Sector Dividend Dogs Index is designed to serve as a fair, impartial and transparent measure of the performance of US large cap equities with above average dividend yields.
The S&P 500 Value Index is a market capitalization weighted index. All the stocks in the underlying parent index are allocated into value or growth. Stocks that do not have pure value or pure growth characteristics have their market caps distributed between the value & growth indices.
The S&P 500 Growth Index is market capitalization weighted index. Growth stocks are measured using three factors: sales growth, the ratio of earnings change to price, and momentum. Constituents are drawn from the S&P 500 Index.
The Russell 1000 Value Index measures the performance of large and mid-capitalization value sectors of the U.S. equity market, as defined by FTSE Russell.
The Russell 1000 Growth Index measures the performance of large and mid-capitalization growth sectors of the U.S. equity market, as defined by FTSE Russell.
Fama-French U.S. Large Cap Growth and Value indexes measure the performance of the growth and value styles versus investing in all large cap U.S. stocks.
Dividend Yield – 12 Month Yield is the sum of a fund’s total trailing 12-month interest and dividend payments divided by the last month’s ending share price (NAV) plus any capital gains distributed over the same period.
ALPS Portfolio Solutions Distributor, Inc. is the distributor for the ALPS Sector Dividend Dogs ETF.
1 Source: S&P Dow Jones Indices Aug. 2, 2018 http://www.indexologyblog.com/2018/08/02/growth-is-still-hot-only-in-small-caps/
2 Source: Wall Street Journal Aug. 5, 2018 https://www.wsj.com/articles/value-stocks-stage-a-rebound-1533481200?mod=hp_lead_pos4
3 Source: Chief Investment Officer Aug. 8, 2018 https://www.ai-cio.com/news/value-stocks-july-rebound-mean-expansion/
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