(Bloomberg) -- Investors are betting on a revival of undervalued stocks once the Federal Reserve starts cutting interest rates.
Exchange-traded funds focused on value stocks — those that trade below what they’re worth — have raked in $6.9 billion so far in September, the cohort’s best month this year, according to data compiled by Bloomberg Intelligence. At the same time, growth-stock ETFs, which tend to be heavily skewed toward big names in the technology sector, have shed about $13 million.
Wall Street traders are riding a rotation out of tech stocks that have contributed to most of this year’s bull run on expectations that the Fed lowering borrowing costs will juice economic growth, and create fresh winners like utilities and real estate. On Monday, the S&P 500 equal weighted index hit a record high.
“This nice broadening move seems to be saying that investors are now more confident that the upcoming rate cuts will help the economy grow next year and help earnings growth spread more evenly,” said Matt Maley, chief market strategist at Miller Tabak + Co.
The Fed is widely expect to kick off its rate-cutting cycle with a half-point move on Wednesday. The market-implied odds that policymakers announce a 50-basis-point rate cut were around 55% Tuesday morning, even after the latest economic data suggested the US consumer is holding up.
More than half of the September influx into value ETFs is coming from the iShares MSCI EAFE Value ETF (ticker EFV), which has been a big beneficiary of BlackRock tweaking its model portfolios. The asset manager reduced its tilt to US equities and growth-oriented shares in favor of value stocks and fixed-income.
“It’s where we’re seeing the best earnings potential,” Tushar Yadava, a strategist at BlackRock, said on Bloomberg’s ETF IQ Monday, referring to EFV. He said that while they’re still overweight growth, they’re dialing some of that exposure back by adding value stocks to portfolios.
Other value funds that pulled in cash in September include the $25 billion billion SPDR Portfolio S&P 500 Value ETF (SPYV), which saw its largest weekly inflow ever last week. The $3.2 billion iShares Russell Top 200 Value ETF (IWX) has garnered more than $800 million this month.
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