Rotation into value stocks has begun, according to JPMorgan Chase. The New York-based investment bank says that value stocks typically outperform when economic conditions are depressed but improving, adding that record stimulus measures, better-than-expected data, and no onset of a second COVID-19 wave create a favorable environment for a switch into value names.
What's more, the bank pointed out that the average rotation period into value stocks since the Great Recession lasted over 100 days and returned roughly 18%, per Barron's. Although value stocks have been slow to participate in the coronavirus market recovery, they have outpaced their growth counterparts by around 5% since mid-May.
From a technical standpoint, three of the largest value exchange-traded funds (ETFs) closed above their 200-day simple moving average (SMA) on Friday. Below, we review the finer details of each fund and discuss possible tactical trading opportunities.
iShares S&P 500 Value ETF (IVE)
With net assets of more than $15 billion, the iShares S&P 500 Value ETF (IVE) aims to provide a similar return to the S&P 500 Value Index – a benchmark composed of large-capitalization U.S. equities that exhibit value characteristics. Legendary value investor Warren Buffett's Berkshire Hathaway Inc. (BRK.B) claims the top single stock allocation at 3.41%, while AT&T Inc. (T) and Chevron Corporation (CVX) also feature in the ETF's top 10 holdings. A low 0.18% management fee, along with deep liquidity, make the fund suitable for both buy-and-hold investing and intraday scalping. As of June 8, 2020, IVE offers a 2.66% dividend yield and has added nearly 13% in the past month.
After flipping resistance into support at $110, IVE shares finished last week by closing above the 200-day SMA for the first time since late February – a move that may give rise to further short-term gains. Traders who expect the bullish momentum to continue should set a take-profit order near the January/February double top pattern at $130 but cut losses if the ETF reverses below the 200-day SMA.
iShares Russell 1000 Value ETF (IWD)
Launched at the start of the new millennium, the iShares Russell 1000 Value ETF (IWD) seeks to track the performance of the Russell 1000 Value Index by investing at least 90% of its $34.22 billion asset base in large- and mid-cap U.S. value companies that make up this benchmark. The fund tilts exposure toward value names in financials and health care, with respective allocations of 26.01% and 15.66% to those sectors. Daily turnover of almost 3 million shares on an average three-cent spread makes the fund a trader's favorite within the segment. IWD yields about 3% and has gained 8.31% over the past month as of June 8, 2020.
The ETF continued its advance Friday, closing above a key horizontal line and the 200-day SMA as the rotation into value stocks accelerated. Those who buy should look for a retest of the late February high at $137.70 and place a stop-loss order either beneath the 200-day SMA or under crucial support at $119.
Vanguard Value ETF (VTV)
The Vanguard Value ETF (VTV) attempts to provide returns that closely match the CRSP US Large Value Index. The underlying benchmark comprises stocks selected using popular value factors, such as the price-to-book ratio (P/B ratio), forward price-to-earnings ratio (forward P/E ratio), and price-to-sales ratio (P/S ratio). Health care conglomerate Johnson & Johnson (JNJ) heads a portfolio of 332 stocks, with the fund's top 10 holdings carrying a combined weighting of about 25%. As of June 8, 2020, VTV controls assets under management (AUM) of $79.02 billion and is trading 12.63% higher over the past month. Investors also receive a 2.98% dividend yield.
VTV shares advanced up the Fibonacci grid last week, closing above the 61.8% retracement level on Wednesday before reclaiming the 200-day SMA Friday morning after the better-than-expected jobs report. Traders who enter here should think about booking profits near the full 100% Fibonacci retracement at around $120 but exit on a breach of major support at $103.