(Bloomberg) -- ETFs that target value stocks are raking in cash. But the people buying those portfolios should buckle their seatbelts, because there could be some turbulence ahead.
Investors have poured more money into smart beta value funds than any other category for at least 11 straight weeks, data compiled by Bloomberg show. In last week’s holiday-shortened four trading sessions, value ETFs, which track stocks priced at discounts to things like earnings or assets, absorbed $1.1 billion, nearly triple the prior week.
But everyone rejoicing the return of value also is facing a frightening reality: Lately the results haven’t been keeping up with the enthusiasm. Last week, the market-neutral, or long-short, version of the value category, also known as a factor, posted its worst two-day return in more than five years, according to Bloomberg portfolio analytics.
"We’re focused on continuing to see value outperform, but you’re not going to have a clear-cut outperformance and theme like you did last year," said Abhra Banerji, director of quantitative research at Evercore ISI. "Last week value struggled. It may have gone out too much and people may be asking if it’s time to take chips off the table. "
Value’s revival began in mid-2016, and in October it posted its best monthly return in more than two years. The inflection point came at the expense of the momentum factor and its close cousin, growth, with value indexes topping growth in nearly every market.
HEDGE FUND JUICE
Hedge fund positioning this year has helped juice recent value factor returns, according to Evercore ISI. Hedge funds became increasingly reliant on momentum stocks last year. Indeed, by November the gap in exposure between momentum and value was the widest it had been in six years, according to quarterly filing data compiled by Evercore. They’ve since unwound those positions as returns lagged, in part spearheading value’s dramatic outperformance.
Still, it’s difficult for value to sustain a long uninterrupted run. As a factor, it’s highly cyclical, so the returns are typically choppy with periods of underperformance mixed in with times of strength. In the four days ending last Friday, the market-neutral growth factor topped value by remaining relatively unchanged as value sunk 0.8%, data compiled by Bloomberg portfolio analytics show.
So investors should expect more periods like last week, Banerji warned.
"If you look at pockets of value right now, it’s very difficult to see these themes continuing year after year," he said. "But is the increase of ETF flow going to be a sign of outperformance? I’m skeptical of that."