As Value and Growth ETFs Stage a Tug of War, Traders Hope Both Win

(Bloomberg) -- In the battle of investing styles, growth and value are on opposite ends of the ideological spectrum. But with traders taking both sides of the bet using BlackRock Inc. ETFs, the question is who will turn out to be right?

Two of the largest exchange-traded funds tracking the classic factors have taken in record cash in November. The iShares Russell 1000 Growth ETF, ticker IWF, took in $353 million last week, its second largest weekly inflow this year in just 3 1/2 trading sessions, putting it on track for its second best month of 2018. Meanwhile, its value counterpart, the iShares Russell 1000 Value ETF, ticker IWD, is also on track for its biggest month of inflows this year, having taken in nearly $1 billion in November.

“There’s a tug-of-war between growth and value investing being played out with IWF and IWD,” said Todd Rosenbluth, director of ETF research at CFRA Research. “Value gained ground in the third quarter, and in October, as the more defensive style with a portfolio of lower priced stocks became in vogue. However, as investors have positioned for the typically strong holiday rally, some of them have also been willing to take on risk and have returned to growth.”

Historically, the fourth quarter is good for stocks, but not so this year. The S&P 500 Index is down almost 9 percent, putting it on track for the worst quarter since 2011. That has investors questioning whether the recent slide is part of a healthy rotation and correction -- or something more. Defensive industries have outperformed in the stock market, and the weakness in equities has spread to credit and oil, developments that have preceded slower growth in the past.

“The central question is: Are the equity markets and oil markets suggesting a significant slowdown in U.S. and global growth next year or is it more internally driven?” Jay Pelosky, chief investment officer and co-founder of TPW Investment Management, said on Bloomberg TV.

Pelosky falls into the latter camp, believing the recent turbulence is more about internal dynamics than a significant pending slowdown. Such a stance might favor growth, although value has been the clear winner since the end of September. And two looming catalysts could influence which way the coin falls: Fed speak this week from Chairman Jerome Powell and Vice Chairman Richard Clarida, and a meeting between U.S. President Donald Trump and Chinese leader Xi Jinping at the Group of 20 summit in Argentina.

The Russell 1000 Growth Index has fallen more than 12 percent in the fourth quarter, over twice the decline in the Russell 1000 Value Index. Flows have followed that performance, with value ETFs taking in more than three times the cash of growth ETFs in November.

“I’d judge this as the messiness of a transition from growth to value, where it doesn’t happen overnight,” said Bloomberg Intelligence analyst Eric Balchunas. “Clearly there’s been a shift to value. It just takes a slower, longer time to play out.”

Still, investors should remember that value and growth aren’t the only factors that can be played through ETFs, according to Holly Framsted, head of iShares U.S. smart beta at BlackRock. Indeed, quality companies with more profitability, less leverage and stable earnings could provide a better buffer in a maturing cycle, she said.

“Investors should keep in mind that both growth and value styles of investing in the purest sense are risk-on approaches,” Framsted said. “Investors may not find the protection they seek with this binary lens.”

--With assistance from Carolina Wilson.

To contact the reporters on this story: Sarah Ponczek in New York at sponczek2@bloomberg.net;Vildana Hajric in New York at vhajric1@bloomberg.net

To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Eric J. Weiner, Andrew Dunn

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