Why Value ETFs May Rule In Q2

The roaring Trump trade lost has some steam this year with the SPDR S&P 500 ETF (NYSE:SPY) (AX:SPY) gaining only 2% (as of Mar 16, 2018). The key reason behind this is the spike in bond yields thanks to economic growth, building inflationary pressure and expectations of faster Fed rate hikes.

Though the broader market has been mostly downbeat in the first quarter, growth ETFs like SPDR Portfolio S&P 500 Growth ETF (AX:SPY) (up about 6%) has surpassed its value counterpart SPDR Portfolio S&P 500 Value ETF (AX:SPY) (down 1.6%). iShares Russell 1000 Growth ETF IWF has gained 4.4% while iShares Russell 1000 Value ETF IWD has lost about 0.4%.

But the trend could change going into the second quarter. Notably, value stocks have the potential to deliver higher returns and exhibit lower volatility compared to growth and blend counterparts. In fact, these stocks outperform the growth ones across all asset classes when considered on a long-term investment horizon and are less susceptible to trending markets (read: What Makes Value ETFs a Winner in the 9-Year Bull Market?).

Below we high light a few reasons why value investing might come into the forefront in the second quarter of the year.

A Flurry of Downbeat Economic Data

Just as inflationary threats took the markets in its grip, the U.S. economy started delivering some downbeat economic readings. U.S. retail sales suddenly fell for three months in a row. Sales dived 0.1% sequentially in February 2018, following a downwardly revised 0.1% decline in January and missing market expectations of a 0.3% gain. This points to signs of weakness in U.S. consumer spending.

Coming to job data, average hourly earnings rose 0.1% to $26.75 in February, marking a slowdown from the 0.3% rise in January. And U.S. consumer-price index in February rose 0.2%, in line with expectations (read: 6 Sector ETFs to Win on Strong February Job Data).

Is Trade War In Line?

The one of key stories of the first quarter would probably be Trump tariffs and a likely trade war among global superpowers. If imposition of a respective 25% and 10% tariff on steel and aluminum imports was not enough, President Trump is reportedly going to levy new tariffs worth up to $60 billion on China, targeting mainly the country’s telecom and technology sector.

The threat of a trade war has been looming large since the start of March. Already, the European Union (EU) has threatened the United States with a tit-for-tat tariff on a range of consumer, agricultural and steel products. China could be the next in line to levy a retaliatory tariff if the trade relation worsens (read: Trade War Talks Heat Up: ETFs & Stocks in Focus).

It is being said by analysts that trade war may dent global growth materially and wipe out gains expected from the tax reform in the United States.

Compelling Valuation of Value Index

The price-to-earnings ratio for the Russell growth index touched its highest since 2002 last year and is now trading at about 20 times forward earnings. On the other hand, the value index is trading below 15 times earnings, marking its lowest since 2016, according to data provided by Thomson Reuters DataStream.

Below we highlight a few top-ranked value ETFs which could be good plays for Q2. These funds have a Zacks ETF Rank #2 (Buy).

iShares Edge MSCI USA Value Factor ETF (NS:VLUE)

The fund includes U.S. large- and mid-capitalization stocks. Information Technology (25.9%) and Financials (14.8%) are top two sectors.

Vanguard Value ETF (HN:VTV)

The fund provides exposure to the largest value stocks. Financials (26%), Technology (14.8%), Health Care (13.6%) and Industrials (11.9%) are the top four sectors (read: Value ETFs & Stocks to Enrich Your Portfolio Amid Volatility).

First Trust Large Cap Value AlphaDEX Fund FTA

The underlying NASDAQ AlphaDEX Large Cap Value Index is an enhanced index which employs the AlphaDEX stock selection methodology to select stocks from the NASDAQ US 500 Large Cap Value Index. Financials, Consumer Discretionary and Utilities have double-digit exposure in the fund.

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