Value exchange-traded funds have lagged growth in 2023 due to an unusual circumstance unfolding in the market, according to two experts.
Tom Hancock, head of focused equity at GMO, said Monday that the leadership of mega-cap, artificial intelligence-driven tech stocks has helped the growth trade to outperform.
"This is an unusual environment where there are so many opportunities for large-cap equities," he told Bob Pisani on CNBC's "ETF Edge." "You don't normally see that."
As of Tuesday's close, the iShares S&P 500 Growth ETF (IVW) has gained 22.84% this year. The iShares S&P 500 Value ETF (IVE) is up 11.27% in the same period.
Still, Nathan Geraci, president of The ETF Store, said just a handful of stocks are behind the outperformance of growth.
"A lot of growth performance this year has been driven by the so-called Magnificent Seven, because if you look at many of the growth indices, they're pretty top-heavy," he said in the same segment. "The largest growth companies have been enough to really drive that performance differential versus value."
Growth's move higher is a marked change from 2022. 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.
"If you think about this, that's a really tough pill to swallow for value investors after it appeared value was turning the corner in 2022 following years of underperformance," he added.
Hancock, who manages the GMO U.S. Quality ETF (QLTY), said although Big Tech's rapid rise has led some stocks to become overvalued, it also has created quality opportunities for value investors.
"From the point of view of a value investor, while some of the most well-known stocks may be at kind of frothy valuations, there's a pretty big supply chain, pretty big ecosystem there. So there's a lot of growth at a reasonable price, high-quality opportunities to invest in," he said.
Hancock suggested investors could still take advantage of companies growing at a high return on capital for a fair price.
"That kind of company has been doing very well, and I think that kind of trend can continue as long as there's innovation and growth opportunities going forward."
