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Relative Strength Rankings Strongly Favor Value ETFs Over Growth ETFs

09 January 2012 at 3:50 pm by Gary Gordon     Bookmark and Share    Follow EtfExpert on Twitter

How do “value” gurus determine worth?¬†Bill Miller spent 30 years at the helm of Legg Mason Value (LMVTX),¬†buying companies that he believed¬†were deeply discounted. This often meant that he would purchase shares of a company where the market had priced the shares less than what¬†was on the accounting books;¬†sometimes, he might acquire shares for less than the cash¬†that the company had on its savings ledger.

Unfortunately, Mr. Miller put a bit too much faith in the books of financial institutions in 2007 and 2008. The former legend never quite recovered from the subprime-inspired collapse. 

LMVTX Versus S&P 500

Warren Buffett looked at value investing in his own way.¬†The “Oracle of Omaha”¬†often chose securities where there is/was an identifiable difference between a current price and¬†an appraisal of future¬†worth. Yet, when one accounts for the reinvesting of dividends,¬†the S&P 500 SPDR Trust (SPY) performed about as well as Buffett’s Berkshire Hathaway (BRK/A).¬†(Note: The S&P 500 chart below doesn’t account for reinvested¬†dividends.)

BRKA 5 Years

Granted, 5 years is not the investing time frame that either Miller or Buffett may have in mind. Nevertheless, the results are still worth noting; that is, one may have done equally well (or better) by holding the S&P 500 SPDR Trust (SPY).

When it comes to “value,” there’s something else worth noting. Specifically, Value ETFs are currently demonstrating far superior¬†momentum than Growth ETFs. While it isn’t always clear what constitutes “value,” let alone what may distinguish it from “growth,” the relative strength percentile rankings are telling.

Relative Strength Comparison Between Value and Growth (3 Months)
Morningstar Style   10/12 Rank 1/9 Rank   % Change
Large Growth (JKE)   79.1   70.8   -10.5%
Large Value (JKF)   57.8   74.2   28.4%
Mid Growth (JKH)   71.2   50.8   -28.7%
Mid Value (JKI)   49.6   66.6   34.3%
Small Growth (JKK)   66.3   55.6   -16.1%
Small Value (JKL)   50.9   70.6   38.7%


Relative percentile rankings for ETFs represent the entire universe. For instance, on 10/12/2011, iShares Morningstar Mid Cap Growth (JKH) registered 71.2. This means that JKH had greater relative strength than 71.2% of the 1300 ETFs in existence.

It’s fairly easy to see that… over the last 3 months… iShares Morningstar Mid Cap Growth (JKH) has been running out of steam. As recently as 1/9/2012, JKH logged a mere 50.8, falling from the top 2/3 back to the middle of the pack. In contrast, iShares Morningstar MidCap Value (JKI) went from the middle of the pack (49.6) in October to the top 2/3; mid-sized “value”¬†corporations have been gaining momentum.

In fact, across the entire spectrum, Value ETFs have been gaining in momentum — large-cap, mid-cap or small-cap. Small Cap Value (JKL) has made the largest leap forward in relative strength.

In contrast, Growth ETFs have been sagging — large, medium and small. Mid-Cap Growth (JKH) has been the least potent investment in the “style box.”

For those that believe in momentum and/or relative strength, one should take note of the definitive shift towards value-oriented ETFs. You may choose to overweight “value” in your portfolio.

For those who¬†are merely curious… the trend¬†is likely to represent¬†the investment community’s increased¬†affection for dividends and perceived safety. Regardless of¬†what¬†companies may actually be in these “Value ETFs,”¬†utilities, health care and consumer¬†staples¬†may be well-represented. These non-cyclical segments may produce slightly higher dividend yields and they may be less affected by economic changes than techonlogy¬†or materials.

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Disclosure Statement: ETF Expert¬†is a web log (‚ÄĚblog‚ÄĚ) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships. You may review additional ETF Expert disclosure details here.

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