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.
Follow Larry
—–
YouTube: LarryBermanOfficial
Twitter: @LarryBermanETF
Facebook: @LarryBermanETF
LinkedIn: LarryBerman
ETF Capital Management: ETFCM.com