Why Invest in
Low Value Stocks?

What is a low value stock?

The high value factor is one of the four traditional factors and refers to the tendency of ‘cheaper’ stocks to produce excess returns vs. the benchmark over the longer term.

The ‘cheapness’ of a stock is measured by its ratio of book value, earnings, and sales to price per share. A low value stock is simply the non-traditional side of the value factor or the opposite side of the value rankings within an index. See the illustration for an example of the high and low side of the value factor:

Why invest in low value stocks?
At first glance, an investor would seemingly want to avoid low value stocks since the literature suggests high value stocks tend to outperform over the long-term.

However, if you take a look at the chart below, you’ll see that low value index (as defined by S&P) outperformed high value stocks in 7 of the 10 years from 2011 to 2020.

Additionally, low-value stocks outperformed the benchmark S&P 500 in 6 of 10 during that same period.


 

It’s well known that (high) value stocks struggled to outperform the benchmark during the past decade, so it’s worth noting the non-traditional side of the value factor, low-value stocks, was the best performing of all the factors observed in 3 of the 10 years from 2011 to 2020. This is why we at Pacer ETFs believe in including both the traditional and non-traditional sides of each of the four factors in our investing universe, since there are years when the non-traditional factor can outperform both the traditional factor and the respective benchmark.
 

While we don’t advocate for a buy-and-hold strategy of low value stocks, we believe investors can take advantage of these periods of outperformance by investing in a multifactor rotation strategy that includes both the traditional and non-traditional sides of each of the four factors and allocates to low value stocks during periods when they exhibit outperformance vs the benchmark.