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By Ben Johnson, CFA and Christine Benz | 02-25-2016 03:00 PM

2 Ways to Bet on a Value-Stock Turnaround

As some investors are giving up on value stocks, these ETFs offer contrarians a potent and a tamer way to capture what could be a resurgent value premium.

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Value stocks have been out of favor for the past several years. Joining me to discuss how to invest in value stocks with an exchange-traded fund is Ben Johnson, director of global ETF research for Morningstar.

Ben, thank you for being here.

Ben Johnson: I'm glad to be here, Christine.

Benz: Ben, let's discuss the performance pattern that value stocks have exhibited. Over long periods of time, value stocks have shown a propensity to outperform, but they have been in a little bit of a drought recently.

Johnson: They have absolutely been in a drought. If you look at the performance of the Russell 3000 Value Index relative to its counterpart, the Russell 3000 Growth Index, it's struggled quite mightily over the past few years, dating back to the relative performance peak between these, the days back when value was winning over growth. If you look at the period from August 2008 through the end of 2015, the Growth Index outperformed the Value Index by 3.9 percentage points on an annualized basis. It's been a long and very difficult stretch for value investors relative to growth investors.

Benz: Value investors were really vindicated in the early part of the 00s, though. Coming out of the technology bubble bursting, they performed very, very well.

Johnson: That's absolutely the case. At the end of the day, these are styles. And like any style, they will go into and out of vogue. Value investors today are feeling a bit like they are showing up to fashion week wearing bell bottoms.

Benz: Which may be back in style, but that's a separate topic.

Let's discuss the flows that we've seen. You keep an eye what investors seem to be preferring in terms of their fund choices. It looks like some investors are losing the faith in value investing.

Johnson: I did an analysis across U.S. mutual funds and ETFs as divided up into our Morningstar large-blend, large-growth, and large-value categories. I tracked those on a 12-month basis over the course of a number of years. What you've seen is that very recently, toward the end of 2015, the trend in terms of flows in value funds has become negative. It appears as though investors are beginning to capitulate and give up on value. And what we've seen historically is that it's exactly this sort of capitulation, this sort of behavioral function, that may actually lead to the existence, the creation, the persistence of the value premium.

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