The continuation of a decade-long trend of consistent, strong performance has kept growth stocks in favor for much of 2017. Recent rallies of out-of-favor value stocks, however, may have investors wondering whether growth will continue on its upward trajectory.

Value Stocks Have Suffered, but May Be Showing Signs of a Comeback1

  • According to Morningstar (as of 9/30/17), value stocks have delivered weak performance, relative to growth stocks, for the better part of the past decade. During this period, investors punished lower-valuation stocks and rewarded the higher-quality and momentum stocks found in traditional growth indices today.
  • However, value stocks may be showing signs of a comeback.

Exhibit 1

Flows into Value Strategies Have Favored Passive, Low-Cost Products

  • Investors have been flocking to value-oriented strategies this year, and they have shown a preference for low-cost index products over actively managed mutual funds. Despite challenging performance, U.S. large-cap value ETFs have seen strong inflows of approximately $13 billion in 2017.2
  • This trend shows no signs of abating, with large-cap value ETFs experiencing $4 billion in inflows during the third quarter of 2017 alone, potentially signaling increased confidence in value companies.

Exhibit 2

Revenue Weighting Offers Purer Exposure to Value, but Does Not Ignore Growth

  • As investors shift their portfolio exposure toward value, they may want to consider the inherent benefits of ETFs and pursue a low-cost approach like revenue weighting. Revenue weighting provides the same broad coverage of the equity market as a market-capitalization-weighted portfolio does. However, it focuses on companies’ sales instead of their stock price and is thus driven to a purer exposure to value.
  • The fact that revenue-weighted portfolios also provide broad market coverage allows them to still capture the performance of growth stocks, which many traditional value strategies, with their exclusive focus only on value stocks, do not.

Conclusion: A Strategy to Consider for Value Positioning

  • Investors seeking a lower-cost, tax-efficient way to orient their portfolios toward value may want to consider adopting a revenue-weighted index approach as a “purer” indicator of value when compared with a market-capitalization approach.

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  1. ^Source: Morningstar, as of 9/30/17.
  2. ^Morningstar, as of 9/30/17.