Value stocks

Still plenty of value in value stocks

Vequities have been strong this year, as highlighted by the fact that the S&P 500 Value Index is flat for the year while the S&P 500 is 4% lower.

Adding dividends to the mix improves the value proposition. Take the case of the ALPS Sector Dividend Dogs ETF (SDOG), which is up more than 3% since the start of the year. SDOG has obvious value characteristics, and its investors are being rewarded accordingly this year.

The strength of SDOG and that of the broader value complex during the first quarter should not be interpreted as limited upside. Some experts argue that the opposite is true.

“In 2021, value finally started to outperform growth. However, this has so far done little to narrow the valuation gap,” notes BNP Paribas. “The inflationary implications of recent geopolitical developments, which raise the prospect of significant interest rate hikes by central banks, contribute to an outlook that we view as significantly more favorable to value than to growth stocks.”

In its note, BNP Paribas mentions the value spread and the premium. Essentially, the value spread is the valuation gap between growth and value stocks, while the value premium is the excess return to growth stocks that value names can potentially offer. What could bode well for SDOG is that spreads remain wide.

“In terms of performance, sector-neutral value strategies and multi-factor strategies rebounded strongly in 2021 as value spreads peaked. Other factor styles such as quality, momentum and low risk also performed well,” adds BNP Paribas.

Sector neutrality is relevant when it comes to SDOG because the ALPS fund evenly weights its sector exposures, which stands in stark contrast to some capitalization-weighted competitors that are overly allocated to a small number of sectors.

Even without outsized exposure to financial services stocks, which are often a hallmark of value ETFs, SDOG also offers investors the benefits of rising rate protection – a trait that has obvious short-term value.

“Furthermore, what was already a value investing scenario may even be bolstered by the clear intention of major central banks to respond to rising inflation by raising official interest rates. Such a scenario is typically unfavorable to growth stocks,” concludes BNP Paribas. “In our view, given that value spreads still have a long way to go, the environment remains particularly favorable for value and multifactor equity strategies.”

Other high-dividend ETFs include SPDR S&P Dividend ETF (SDY)the iShares Select Dividend ETF (NYSEArca: DVY)and the iShares Core High Dividend (HDV) ETF.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.