It was a great week for our large cap value ETF (IWD), as it gained 4.0%. Value stocks (such as the ones in our ETF) have a long history of outperforming growth stocks over the long term (e.g. 10+ year periods). And now is a great time to own value stocks given that they have been underperforming growth in recent years. Said differently, now is a great time to buy low.
Growth stocks have performed well over the most recent market cycle because of the accommodative monetary policies in the US. With the fed setting interest rates so low, it’s been easier for risky growth companies to borrow money to fuel cheap growth. However, it will be bad news for growth stocks when the fed eventually starts to raise interest rates as they are widely expected to do within the next several months. It’s unusual for growth stocks to outperform value for as long as they have (see the chart above) but when it does happen it usually ends badly for growth stocks. For example, it ended very badly for growth stocks when the tech bubble burst in the early 2000’s. As contrarian investors, we believe now is a great time to own value stocks such as the ones in our large cap value ETF (IWD).