Value Funds Could Start Slowing Down. Where to Find the Next Leg of Gains.


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Value funds figure to benefit from a recovering economy as businesses reopen and diners return to restaurants. Here, a restaurant in Manhattan Beach, Calif.


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Tuesday marks the one-year anniversary of the pandemic-triggered market crash, which touched the bottom on March 23, 2020. Since then, stocks have rebounded to new highs. But 2021 has brought renewed volatility, and there has been a shift in front-runners.

Now, as investors look to the future, a few corners of the market—and the funds investing in them—will likely bring the next leg of gains. But don’t expect smooth sailing.

Last year’s rally was driven by a sharp rise in growth stocks, especially those benefiting from consumers’ shifting working and living habits. Since the bottom, most of the best-performing funds have centered on themes like clean energy, disruptive technology, cannabis, and online retail. Other more diversified growth funds, such as the

iShares S&P 500 Growth

exchange-traded fund (ticker: IVW), also rallied for most of 2020.

Over the past few months, however, value stocks have staged a strong comeback as investors began to price in the positive impact of the reopening economy, Covid vaccine rollout, and more stimulus. That dynamic has become more pronounced since the start of the year as rising interest rates and inflation concerns, which would discount the future value of growth names, have moved to the fore of investors’ minds. Year to date, the

Invesco S&P 500 Pure Value

ETF (RPV) has gained 23.8%, while the

Invesco S&P 500 Pure Growth

ETF (RPG) declined 2.5%.

Nick Kalivas, head of factor and core equity product strategy for Invesco ETFs, thinks value stocks are likely to continue their strength in the next few months. “We haven’t fully reopened [the economy] yet, we still have the favorable tailwind of fiscal and monetary policy,” he says. “Although value has done very well, it’s still not near the peaks we saw at other points in the cycle.”

In the later part of the year, however, Kalivas believes high-quality stocks will re-emerge as the dominant force, as the easy money in small-cap and value are taken off the table. Economic growth will start to decelerate after the initial burst, he says, and that is typically the time for high-quality stocks—with strong balance sheets and organic earnings growth—to shine. The

Invesco S&P 500 Quality

ETF (SPHQ) and

iShares MSCI USA Quality Factor

ETF (QUAL) could offer exposure to the group.

Gene Goldman, chief investment officer at Cetera Investment Management, echoes the sentiment. As the recovery broadens, consumers’ pent-up demand will drive strong earnings growth in 2021. He expects stocks to rise about 10% this year even though valuations might shrink. Cetera Investment has been overweight value and cyclical sectors like industrials, materials, and energy over the past few months.


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Goldman suggests investors avoid the sectors that could be hurt by rising interest rates, such as consumer staples, utilities, and real estate, while remaining bullish on financials. The

Financial Select Sector SPDR

(XLF) has soared 40.7% over the past five months, beating the S&P 500 index by nearly 26 percentage points. Still, Goldman thinks there is more upside, as banks typically benefit from the steepening yield curve, rising rates, and economic recovery.

All that being said, he expects to see a lot more headwinds in 2022, including rising debt, potential tax increases, and higher yields. Cetera Investment plans to start reducing its exposure to value and cyclicals in the next three to six months in preparation for a more tepid 2022. Goldman suggests investors seek growth in alternative strategies that are less correlated with stocks. “The stock market loves positive surprises, but those surprises will start to decline pretty quickly,” he says.

Write to Evie Liu at evie.liu@barrons.com