Value ETFs: Are Investors Keeping Their Distance From 'Growth'?

Closing out one of the worst years in a century of stock market trading, some investors seem to believe that 2009 MUST be more profitable. Granted, the S&P 500 appears poised to lose 38% in a single year, but it could have been far worse.

As recently as November 20th, the S&P 500 closed at 752 and the year-to-date losses had reached 48%. Instead, stocks have climbed roughly 20% off of those November lows, back up to approx S&P 900.

Yes, it is hard to imagine that we began the year at S&P 1468, and feel any relief to see S&P 900. Nevertheless, there are plenty of signs that.. well... maybe the economy can get worse, but that the markets have mostly taken this into account.

Can things only get better for stock assets? It seems to me, investors have been hedging their bets by putting a bit more faith in "value" ETFs.

In my estimation, there are 10 broad-market "value" ETFs and 10 broad-market "growth" ETFs. There are others, but the small asset base on other value ETFs or growth ETFs make them less worthy for discussion. In essence, then, Barclay's iShares, Powershares and Vanguard are the fund families worth noting.

Through Friday's 12/26/08 close, 5 of the10 "value ETFs" had climbed above short-term moving averages. In contrast, none of the growth ETFs had yet risen above their respective 50-day trendlines.

The 5 "Value ETFs" that had climbed into short-term uptrends were:

iShares Russell 2000 Value (IWN)
iShares MidCap 400 Value (IJJ)
iShares S&P Small Cap 600 Value (IJS)
PowerShares Dynamic Large Cap Value (PWV)
Powershares Dynmic MidCap Value (PWP)

With the last 2 days of the year providing a bit of a late-push rally, however, 3 or 4 more of the remaining "value" ETFs seem poised to join in the reindeer games. Not to be left behind, 6-8 of the growth ETFs may also claim near-term uptrends by the end of the day, 12/31/08.

There's not a mind-numbing difference between any of them, to be fair. Yet there's some evidence that "growth" investing may have a bit more persuading to do.

Growth typically leads the stock market out of a recession, and many investors seem to think we'll have to wait for 2010 before companies are growing again. That may have something to do with investor caution.

It would seem, perhaps, that conventional wisdom is telling the mainstream investor to stick with old-fashioned companies that have tons of cash on hand; that is, stick with companies that, in spite of being beaten down, will produce like an old, reliable coffee machine. Indeed, if successful investing is about buying companies on the cheap, then "value" may be the good-to-the-last-drop spot.

I have my doubts, however. More to the point, many of the so-called growth companies have been beaten down with a much uglier stick throughout 2008. It stands to reason that some of the best bargains may actually be on the growth side. After all, when credit is flowing again, when smaller companies can borrow money, won't the growth companies be able to post some of the biggest upside surprises?

If the stock market is going to look 9 months out, keep your eyes on late March/early April. You may see the iShares Russell MicroCap Index Fund (IWC), the smallest companies with room to grow, finally push beyond the S&P 500 SPDR Trust (SPY).

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.