Nearly 85% of advisors surveyed by VettaFi during a recent webcast hosted with FlexShares believe that value will outperform growth over the next 12 months. This is likely impacted by recent performance, as the iShares Russell 1000 Value ETF (IWD ) and the iShares S&P 500 Value ETF (IVE ) have lost at least 1,450 fewer basis points than their growth index-based counterparts year-to-date through June 27. However, as the adage goes, past performance is not indicative of future results, so it is best to understand what these value ETFs own for the future.
Index-based ETFs are often referred to as passive investment strategies, in comparison to actively managed ones from firms like ARK Invest or T. Rowe Price, because the managers of these index ETFs do not have discretion to buy or sell securities at any time. But passive does not mean static, as index-based ETFs are reconstituted based on a set schedule determined by the index provider. For example, last week IWD and the iShares Russell 1000 Growth ETF (IWF ) changed some positions, as the Russell indexes they track went through an annual reconstitution.
Among the stocks sold from IWF and bought by IWD are Meta Platforms (META), formerly known as Facebook, and Netflix (NFLX). These two “FANG” stocks have declined by more than 50% since the start of 2022. While many investors might still think of them as growth stocks, they are now a part of the value ETF IWD along with Exxon Mobil (XOM), Johnson & Johnson (JNJ), JPMorgan (JPM), and Verizon Communications (VZ).
However, META and NFLX remain part of S&P 500 Growth Index-based ETFs such as the iShares S&P 500 Growth ETF (IVW ) and the SPDR Portfolio S&P 500 Growth ETF (SPYG ). They are currently not part of IVE or the SPDR S&P Portfolio S&P 500 Value ETF (SPYV ). The S&P 500 Style indexes are reconstituted annually in December, meaning that advisors cannot just believe that value will outperform growth (or vice versa) but instead need to understand what value stocks are part of any ETF they own or are considering.
Of course, there are many other value ETFs, such as the Alpha Architect U.S. Quantitative Value ETF (QVAL ), the Invesco S&P 500 Pure Value ETF (RPV ), the iShares MSCI USA Value Factor ETF (VLUE ), and the Vanguard Value ETF (VTV ), which are rebalanced and reconstituted on different schedules and based on distinct criteria. These differences result in unique portfolios and track records.
This is evidenced by the more than 500 basis point differential between the ETFs RPV and IVE despite their being tied to the same parent S&P 500 Index. The stronger-performing RPV is more concentrated in deeper value stocks than IVE and excludes some of IVE’s largest positions. For example, JPM and JNJ are not RPV constituents, but XOM and VZ are.
Despite what advisors may think, there is not a unanimous opinion on what is a value stock.
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