Rare circumstance for growth vs. value trade: ETF experts view unusual environment

According to two experts, the value exchange-traded funds have underperformed in 2023 due to a unique market event.

GMO's head of focused equity, Tom Hancock, stated on Monday that the growth trade has outperformed due to the leadership of mega-cap, AI-driven tech stocks.

Bob Pisani on CNBC's "ETF Edge" was told by someone that this environment is unusual due to the abundance of opportunities for large-cap equities, which is not typically seen.

As of Tuesday's close, the has gained 22.84% this year, while the is up 11.27% in the same period.

Nathan Geraci, president of The ETF Store, stated that only a few stocks are responsible for the growth outperformance.

The growth performance this year has been mainly driven by the so-called Magnificent Seven, as many growth indices are top-heavy, and the largest growth companies have significantly contributed to the performance differential versus value.

The IVE value ETF fell 7.38% last year, while the IVW growth ETF dropped 30.08%. Geraci said the reversal in value's performance this year caught investors by surprise.

Value investors may find it difficult to accept that their investment strategy has underperformed again after showing signs of improvement in 2022.

Although Big Tech's rapid rise has led some stocks to become overvalued, it has also created quality opportunities for value investors, according to Hancock, who manages the GMO U.S. Quality ETF (QLTY).

A value investor sees potential in the supply chain and ecosystem of some stocks, even if they are overvalued, as there are many opportunities for growth at reasonable prices.

Hancock proposed that investors could still obtain a fair price for companies with high returns on capital.

The company has been performing well and I believe the trend will persist as long as there are opportunities for innovation and growth.