Value ETFs see $1 billion in inflows in a month, but growth will outperform heading into elections, CFRA says

Could it be value stocks’ time to shine?

Value-based exchange-traded funds — which take into account factors such as dividend yields and price-to-earnings ratios to choose their holdings — have accrued $1 billion in inflows over the past month, according to CFRA Research’s First Bridge Data.

Some of that money came from growth ETFs as investors sold Big Tech during its worst pullback in months, “but not all of it,” said Todd Rosenbluth, senior director of ETF and mutual fund research at CFRA.

“Some of [it] moved to the sidelines or investors wanted to be even more diversified,” he said Monday on CNBC’s “ETF Edge.” “We still think growth has the next leg to go higher.”

With interest rates staying low for the foreseeable future and a “cyclically strong” quarter ahead, funds such as the iShares S&P 500 Growth ETF (IVW) and the Vanguard Growth Index Fund ETF (VUG) are poised to climb and resume their lead over value, Rosenbluth said.

“We think that growth is going to outperform as we head into the election,” Rosenbluth said. “We need interest rates to climb higher for value strategies to do well.”

In general, Rosenbluth said CFRA took a “barbell approach” to investing. The firm recommends being overweight the information technology and communications services sector for the growth side of the equation, and having strong positions in the health-care and consumer staples sectors as defensive plays.

“We do think investors need to balance their portfolio,” he said.

Steve Grasso, director of institutional sales at Stuart Frankel, attributed value’s longtime underperformance to a “perfect storm” of widespread uncertainty, ongoing deflation and decades of declining interest rates.

“People are starting to feel as if the deflation cycle is coming to an end and we’ll start to see inflation picking up. Or at least with rates, they don’t have to move aggressively higher, they just can’t move lower. So I think the two of the three drivers that we’ve seen for the underperformance of value are starting to have cracks in the armor,” Grasso said in the same “ETF Edge” interview.

With investors piling into Apple and Tesla after their recent splits and flocking to Nvidia after its purchase of Softbank’s Arm Holdings, growth plays have a tendency to overheat, Grasso warned.

“You have to ask yourself, with Tesla up [400]% year to date and Nvidia up [119]% year to date, where is the next 30-50% to the upside coming from? Is it going to come from those names or is it going to come from the names on the value side of the spectrum that are down 30-50% as of late and this year in particular waiting on the economy to restart?” he said.

“Just look at the latest sell-off,” he added. “We saw growth really take a hit extremely hard and we’ve seen value actually move sideways to fractionally lower when you look at the chemical space, the materials space and the industrials. And I think that’s a sign of things to come.”

The fundamental backdrop is starting to support a possible value pop as well, Grasso said.

He pointed to FedEx’s plan to hire 27% more seasonal workers than it did last year to manage the delivery surge during the holidays.

“If that’s the case, what are they going to put these products in? They’re going to put them into the paper stocks, he said. “I’m long an individual name — Westrock, WRK — but when you look at these chemical names, they’ve been so beaten up and trading at trough valuation, there’s really not a lot of positive stuff that needs to happen to have these stocks move up 25-75% rather quickly.”

IShares’ Growth ETF (IVW) and Value ETF (IVE) climbed more than 1% on Monday. The IVW is far outperforming the IVE year to date, however, up 19% versus the IVE’s 11% loss.

Disclosure: Grasso owns shares of Westrock.