Wall Street has been rallying hard in recent weeks on strengthening vaccine hopes and may be due for further gains led by cheap value stocks. In fact, value stocks have gained more than momentum stocks in recent months. The favorable operating backdrop and damn cheap valuation are leading value stocks higher.
In the past-month frame (as of Nov 16, 2020), SPDR Portfolio S&P 500 Value ETF SPYV has gained 7.1% versusthe2.6% uptick inSPDR Portfolio S&P 500 Growth ETF SPYG and 0.8% decline iniShares MSCI USA Momentum Factor ETF MTUM.
Options investors, who played a great role in boosting technology stocks to record highs with massive buying this year, are now targeting unloved corners of the market – small-cap and other economically sensitive sectors, to bet big on the hopes of a sooner-than-expected launch an effective COVID-19 vaccine.
Notably, Wall Street rejoiced back-to-back positive update on the vaccine front in the past 10 days. On Nov 9, a Pfizer (NYSE:PFE) and BioNTech (BNTX) vaccine candidate was announced to be more than 90% effective in avoiding COVID-19 in its clinical trial. To add to the joy, Moderna (NASDAQ:MRNA) said this week that its vaccine was over 94% effective in preventing the virus.
Apart from this, the likelihood of a divided Congress in the United States acted as a tailwind. In a nutshell, the global markets have been riding higher lately on the dual tailwinds of a likely divided U.S. Congress (which indicates the likely reiteration of the existing policies) and vaccine optimism (which indicates a return to economic normalcy) (read: Vaccine Hopes & Divided Government: Sector ETFs to Win).
“The scale of the rotation to cheap “value” stocks from trendy “momentum” names was the most violent on record, eclipsing even the turmoil of the 2008 financial crisis or the bursting of the dotcom bubble,” as quoted on Financial Times.
Will the Rally in Value Stocks Last?
Anemic growth in developed economies, QE scenario and muted bond yields have kept value investing subdued in the past decade. Even after last week’s fall, “growth” stocks are still up more than 25% this year, and have jumped 225% over the past decade, per MSCI’s global index. In comparison, value stocks have gained just 88% in the last 10 years, the Financial Times article noted.
The performance is way more divergent this year as SPYG is up 26.5% while SPYV is down 4.4%. This has made value investing cheaper and a lucrative bet right now. And growth stocks now trade at an average price-to-earnings ratio of 38 times, while value stocks trade a PE ratio of 17 times, per Citigroup (NYSE:C) analysts, quoted on Financial Times.
But then, everything boils down to the number of coronavirus cases as well as the launch and availability of the vaccine. If things turn right on the vaccine front, one can surely expect a rise in economic activity and bond yields, and a rally in value stocks. On the other hand, if the health crisis and the economy take longer to turn normal, bond yields will remain low and growth stocks will again prevail.
In any case, the long-term outlook for the tech-driven growth stocks is rosy as the pandemic pointed to the pressing need for technology in every aspect of our life. Against this backdrop, below we highlight a few ETFs that could be played as long as vaccine rally prevails.
ETF Picks
iShares S&P SmallCap 600 Value ETF IJS
The underlying S&P SmallCap 600 Value Index measures the performance of the small-capitalization value sector of the U.S. equity market. It yields 1.76% annually.
Invesco Dynamic Oil & Gas Services ETF PXJ
The fund follows the Dynamic Oil Services Intellidex Index. The index thoroughly evaluates companies based on a variety of investment merit criteria, including: price momentum, earnings momentum, quality, management action, and value. The SEC 30 Day Yield of the fund was 4.67% as of Nov 16. However, energy funds can be very volatile in the current scenario.
SPDR S&P Bank ETF KBE
This ETF offers exposure to U.S. banking institutions. Even amid the peak of the pandemic, banking stocks’ business has not been that battered as feared. Though the near-term outlook is not rosy, the segment should survive ahead because of business diversification.
First Trust Dow Jones Global Select Dividend Index Fund FGD
The fund tracks a yield-weighted index of the top 100 dividend-yielding stocks in 25 developed countries. It yields 6.24% annually.
First Trust NASDAQ Technology Dividend ETF TDIV
If you are lover of technology, you can bet on this value corner of the sector. The underlying NASDAQ Technology Dividend Index includes up to 100 Technology and Telecommunications companies that pay a regular or common dividend. The fund yields 2.03% annually.
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SPDR S&P Bank ETF (KBE): ETF Research Reports
First Trust Dow Jones Global Select Dividend ETF (FGD): ETF Research Reports
First Trust NASDAQ Technology Dividend ETF (TDIV): ETF Research Reports
Invesco Dynamic Oil & Gas Services ETF (PXJ): ETF Research Reports
iShares S&P SmallCap 600 Value ETF (IJS): ETF Research Reports
SPDR Portfolio S&P 500 Value ETF (SPYV): ETF Research Reports
SPDR Portfolio S&P 500 Growth ETF (SPYG): ETF Research Reports
iShares MSCI USA Momentum Factor ETF (MTUM): ETF Research Reports
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