Now Is The Time To Invest In Value ETFs

By Casey Murphy | Updated September 02, 2014 AAA

When it comes to analyzing financial products, investors fall into two camps: technical analysis or fundamental analysis. Technical analysis considers only price action, which is studied on the charts, while fundamental analysis pays little attention to current pricing but instead looks at factors that drive the underlying business such as profitability, cash flow and financial leverage.

Value vs. Growth

For those who choose the fundamental approach, they quickly find themselves determining whether to buy growth or keep their money safe by looking for value. Investors who prefer growth stocks try to identify businesses that, as the name suggests, will grow faster than other businesses and thus command a higher premium in the market. Value investors are primarily concerned with assets that trade below their intrinsic value.

Is it better to invest in growth stocks or value stocks? As you can see from the chart below, so far in 2014 the answer has been value stocks. The chart compares the performance of several key exchange traded funds that are used by investors to track each style of investing.  For more information, check out the How To Pick Your Investment Style Video.

The natural question for many is whether it is better to invest in growth stocks or value stocks?

Let's take a look at several ETFs that track the performance of growth and then value stocks:

Growth Stock ETFs

ETF

Ticker

Price

YTD Performance

Expense Ratio

iShares Russell 2000 Growth ETF

NYSE:IWO

$130.41

1.02%

0.25%

Vanguard Growth ETF

NYSE:VUG

$92.60

-0.48%

0.09%

iShares Russell 1000 Growth ETF

NYSE:IWF

$85.74

-0.24%

0.20%

 

Value Stock ETFs 

ETF

Ticker

Price

YTD Performance

Expense Ratio

Vanguard Mid-Cap Value ETF

NYSE:VOE

$82.22

3.06%

0.10%

iShares Russell 2000 Value ETF

NYSE:IWN

$99.08

-0.42%

0.25%

SPDR S&P 500 Value ETF

NYSE:SPYV

$94.55

2.11%

0.20%

 

Increasing Exposure To Value

The Vanguard Mid-Cap Value ETF (NYSE:VOE) has an ultra-low expense ratio of 0.10%, which according to Vanguard, is 92% lower than the average expense ratio of funds with similar holdings.

The low expense ratio combined with an average annual return of 8.68% makes this ETF one of the top selections for those looking for value-based investments. It has total net assets of $5.1 billion and consists of 201 stocks. At the end of the first quarter, the top ten largest holdings comprised 11.1% of the fund. Several key components include Irvine, Calif.-based Western Digital Corp. (NYSE:WDC), Canonsburg, Pa.-based Mylan Inc. (Nasdaq:MYL) and Natick, Mass.-based Boston Scientific Corp. (NYSE:BSX). It is important to note that the mid-cap nature of this ETF increases the risk to the investor compared to a fund such as the SPDR S&P 500 Value ETF (NYSE:SPYV).

By comparing the two charts below, you’ll notice that both value ETFs are trading within a strong uptrend. The 200-day moving averages (red line) of each fund have acted as a strong level of support. Investors will want to protect themselves from downside risk by placing a stop-loss order below these strong support levels. Those who are risk averse may prefer the SPDR S&P 500 Value ETF. However, another option may be to tighten the risk/reward ratio when investing in the Vanguard Mid-Cap Value fund by placing a stop-loss order below the nearby ascending trendline (dotted blue line).  For those comfortable with risk, the mid-cap nature of the Vanguard fund could reward investors with increased performance. That's been the case so far this year. 

By comparing the two charts below, you’ll notice that both funds are trading within a strong uptrend.

It is interesting to see how the 200-day moving averages (red line) of each fund have acted as a strong level of support.

The Bottom Line

Value investors often find themselves with the choice of investing in value or growth. So far in 2014, the winners have been those who have followed value. It will be interesting to see if this trend continues throughout the rest of the year. For those looking to increase their exposure to value stocks, the ETFs mentioned in this article would make for an ideal starting point, particularly the Vanguard Mid-Cap Value ETF and the SPDR S&P 500 Value ETF.

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