Should You Add a Value ETF to Your Portfolio in May?

Technology stocks came roaring back in April, with the tech-heavy Nasdaq Composite jumping some 15% in the month. The surge reversed the index's first-quarter correction.

So far in May, the momentum has continued. The Nasdaq has risen about 5.5% already, as of May 11. It seems the bull market, now in its fourth year, just keeps charging forward, despite the Q1 dip.

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But investors should remain cautious and ultra-vigilant about diversification. Markets remain volatile and uncertain, with war, inflation, and tariff policies clouding growth trajectories. In addition, tech stocks remain overvalued, with the Nasdaq's price-to-earnings (P/E) ratio currently around 34, which is above average.

While corporate earnings remain strong, the question in the near term will be whether they are high enough, in the face of potential economic challenges, to maintain their high multiples.

That means that investors should probably not pile back into tech and growth exchange-traded funds (ETFs) and overweight their portfolios like itʻs 2023. While tech stocks should be a staple in any portfolio, investors should maintain balanced portfolios that include healthy portions of international stocks and ETFs and value stock ETFs.

Value beating growth

It may come as a surprise to some that value stocks have outperformed growth stocks year to date. Over the past year, the Russell 1000 Growth Index has returned 31%, outperforming the Russell 1000 Value Index, which has returned 26%. But over the past six months, there has been a shift. In that time, the Russell 1000 Value Index has gained 14.4%, compared to 4.9% for the Russell 1000 Growth Index. Year to date, the value index is up 10.2%, while the growth index is up just 3.6%.

Historically, value stocks have outperformed growth stocks coming out of a bull market and in the period that follows, whether it's a bear market or a period of slower growth. Some strategists, like those at Vanguard, see the latter occurring over the next decade or so.

In its recent capital markets outlook, Vanguard calls for a roughly 6% annual return for U.S. equities over the next 10 years, with value and developed nation international stocks outperforming growth, and small-caps beating large-caps.

Given the resurgence of value stocks and the historical trend of value outperforming growth coming out of bull markets, the case for adding value ETFs to your portfolio is strong right now.

It is particularly critical here in May, when tech stocks are surging, and valuations are creeping back up.

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