ETF Investors Are Preparing for an Economic Slowdown

ETF Investors Are Preparing for an Economic Slowdown

  • Selling value funds is sign of late cycle trading activity
  • Vanguard, iShares value ETFs are seeing heavy volume this week

Value stocks were supposed to have a stellar year. Instead they’re bleeding assets, which could portend dangerous times ahead for the stock market.

An index tracking a market-neutral value strategy, which picks shares that are cheap relative to the underlying company’s assets, is trading at its lowest level since 2013 and is on pace for a third consecutive month of declines. A couple of value-focused exchange-traded funds absorbed big block sales on Tuesday, boosting trading volumes for the ETFs.

The Vanguard Value ETF, or VTV, absorbed $424 million in trades yesterday, almost triple its average daily volume over the past year. Investors also moved about $274 million worth of the iShares S&P 500 Value ETF, or IVE, more than double the average daily turnover in the past year.

If investors continue to chuck them aside, it’s a troubling signal for a U.S. economy that could be on the verge of slowing down. The thinking goes that value stocks do best during expansionary phases, when strong corporate profits lift even the most chronically underpriced shares. In the later cycles, investors gravitate toward growth and quality stocks that can gin up profits independent of the economic backdrop.

“With the yield curve flattening, signaling lower growth, managers are shifting once again to the uber growth names, like the FANG play” said Dave Lutz, head of ETFs at JonesTrading Institutional Services, referring to the fast rising tech stocks Facebook Inc., Inc., Netflix Inc. and Google parent Alphabet Inc.

— With assistance by Tom Lagerman