What Does Value over Growth Mean for the S&P TSX

You may have heard me and other suggests that value stocks will likely outperform growth stocks in the inflationary environment we are in. The S&P TSX is a very heavily tilted value index largely due to its lack of info technology and consumer cyclical stocks that tend to have higher price-to-earnings (P/E) and price-to-book (P/B) ratios. There are other ways of considering value in stocks, but these are two key metrics. By way of ETFs, there are a few options on how to tilt your portfolio towards having more value in it.

Up until September, most of the S&P TSX and value in general were tracking with a similar performance. As the FOMC started to float the idea that inflation might be a bit stickier than they expected, value stocks started to improve relative to the broad TSX. Shopify (SHOP), the huge Canadian tech stock with high P/E and P/B ratios was the largest stock in the S&PTSX in September at a bit over 7%. Royal Bank (RY) was about 1% less at the time. Today, RY and TD are both larger than SHOP that is down to about 5%.

When we consider value, price relative to earnings and price relative to book value are key metrics. For the S&P TSX overall today, the trailing P/B is about 2.2 and the P/E is about 17.9. These are only slightly elevated from historical average compared to the S&P 500 that has P/B close to 5 and P/E close to 27. The numbers are a better looking forward as earnings expectations are pretty good.

The table looks at the 5 value factor ETFs and some of their holdings and ratios. We can see that not all value ETFs are created the same way. The iShares (XCV) has a huge weight in financials while the BMO ZCV has more of a weighting similar to the S&P TSX. We like this approach better because it’s not about just eliminating high ratio sectors, it’s about finding the best value while including all sectors similar to the index.

Have a look at the value names this year and make sure you have a few more of these names in your portfolio. In a regime of less central bank support and rising yields and elevated inflation, value should attract investment flows that leave the higher priced (higher risk) stocks. While high P/E, P/B growth stocks are great in the long-run, this part of the business and market cycle may not be a friendly. Good dividend paying good value stocks should perform much better over the next few years as central banks remove their extraordinary support for markets and the economy.

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