Why The Growth-to-Value Rotation Is Positive for Disruptive Growth

It's just one comparison, but as of May 21, the Vanguard Value ETF (NYSEARCA:VTV) has hauled in $8.43 billion in new assets this year while the iShares Russell 1000 Growth ETF (NYSEARCA:IWF) bled $2.56 billion.

Throw in $11.54 billion directed to the Financial Select Sector SPDR (NYSEARCA:XLF) – a sum surpassed by just two other exchange traded funds – and it's fair to say the growth-to-value rotation is happening in earnest.

There's good reason for that rotation because, after more than a decade of lagging, value is trouncing growth this year. Year-to-date, the Russell 1000 Value Index is higher by 17.2%, beating its growth counterpart by a margin of better than 3-to-1.

Obviously, given the veracity of the value resurgence this year, it's a plus that growth is up at all. Some well-known growth investors see a silver lining in this scenario. One that, over the long haul, could ultimately prove positive for disruptive growth strategies.

Extending the Bull Market

Clearly, the bear market induced in March 2020 by the coronavirus pandemic was brief, historically speaking. Still, it also gave way to a new bull market – one that's being extended by the value rebound. On many levels, that's a positive, not the least of which is the fact that the COVID-19 bear market is not comparable to the 2000 tech bubble or the global financial crisis.

“This rotation has broadened and strengthened the bull market significantly, preventing another tech and telecom bubble and setting the stage for another leg up in innovation-based strategies,” says ARK Invest CEO and CIO Cathie Wood. “Had the equity market continued to narrow toward innovation, the odds of a bust like that after the tech and telecom bubble would have increased.”

Put simply, the current state of affairs is that investors are favoring value over growth, but the case for the latter isn't dead. In fact, recent weakness in some disruptive growth strategies provides advisors with an avenue to discuss with clients getting involved with assets that are rarely on sale or potentially averaging down into previously established positions.

“The good news is that fear, uncertainty, and doubt (FUD) have provided investors with an opportunity to average down into some innovation strategies at an approximate 30-40% discount to their recent peaks,” adds Wood. “Typically, FUD accelerates the adoption of new technologies as concerned businesses and consumers change their behavior patterns and adopt products and services that are less expensive, more productive, and more creative than those in the legacy world.”

Remembering that rising 10-year Treasury yields and inflation are two of the primary reasons growth is out of favor this year, that provides all the more opportunity to revisit disruptive growth because both scenarios, particularly in inflation, are seen as transitory, not long-lasting or permanent.

Additionally, it pays to remember where the U.S. economy is in the economic cycle. Albeit a brief one, but a recession was caused by the pandemic. Along those lines, the economy is still in the recovery phase – a period that historically favors cyclical sectors, not growth fare.

Keeping Things in Perspective

What's interesting about the current cyclical rally is that it's being driven in large part by the energy and financial services sectors. Pent up demand for travel is fueling higher oil prices while rising interest rates are powering bank stocks.

That's interesting because traditional fossil fuels producers and financial services providers are among the industries most at risk of disruption. Undoubtedly, the 2021 strength in these sectors is noteworthy and a positive for clients with exposure, but the innovation cat is out of the bag and these groups are highly vulnerable.

“In our view, autonomous electric vehicles and digital wallets, including cryptocurrencies and the decentralized financial services (DeFI) associated more broadly with blockchain technologies, will disrupt and disintermediate both Energy and Financial Services significantly during the next five years,” said Wood.

So some good times are here for some once moribund sectors, but it looks like it's also a good time to revisit disruptive growth before it's back in fashion.

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