Value stocks

There’s still a lot of value in value stocks

Value stocks have proven to be robust this year, as underlined 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 ETFs (SDOG B)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 his note, BNP Paribas discusses the value gap and the premium. Essentially, the value spread is the valuation gap between growth and value stocks, while the value premium is the higher yield than the growth stocks that the value names can potentially offer. Which 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 styles of factors such as quality, momentum and low risk also performed well,” adds BNP Paribas.

Sector neutrality is relevant with regard to SDOG because the ALPS fund equally weights its sector exposures, which is a marked departure from some market-cap-weighted competitors that are excessively allocated to a small number of sectors.

Even without outsized exposure to financial services stocks, which is often the hallmark of value ETFs, SDOG also offers investors the benefit of protection against rising rates — a feature whose short-term value is obvious.

“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 generally 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 ETFs (SDY B)the iShares Select Dividend ETFs (DVY B+)and the iShares Core High Dividend ETFs (HDV A-).

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