3 Value ETFs Poised To Outperform [Rydex S&P 500 Pure Value ETF, iShares S&P 500 Value Index (ETF)]

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May 12, 2014 4:50pm NYSE:FTA NYSE:IVE

new etfsNeena Mishra: Growth stocks had a strong performance last year as the Fed’s massive support encouraged investors to pour money into hot sectors which had higher growth potential.

But the trend has reversed in the past few weeks as investors dumped glamour stocks with insane valuations and sought refuge in big, boring and stable companies with attractive valuations.

As the economy is slowly picking up and the Fed is gradually withdrawing its support, stock market may still move higher but investors are now a little wary of pricier corners of the market.

One of the reasons for increased investor interest in cheap stocks is the belief that once economic recovery becomes self-sustaining, more sectors will be able to expand their earnings growth. History also suggests that value stocks tend to perform well later in the economic cycle.

While it remains to be seen if the rotation from growth to value will continue in the coming months, research suggests that strong rotations like this are usually followed by periods of value outperformance.

Further in the past, strong bull markets have usually been led by growth stocks while value stocks have outperformed during periods of muted market performance. (Read: 3 Incredible ETF Buys under $20)

However, finding value stocks has become very challenging for investors now as valuations look stretched in almost all corners of the market after five years of bull-run.

After scanning the value ETFs space (primarily large-cap), I found 3 ETFs that still look quite attractive in terms of valuations. These are not plain vanilla value funds; instead they employ enhanced strategies to dig deeper and pick stocks with “best” values.

In the ETF world, “cheap” may refer to “low expense ratio” or “low valuation”. If you are looking for value ETFs with dirt-cheap expenses for very long-term investing.

The three ETFs discussed here are not cheapest in terms of expense ratios but with their consistence outperformance over other large cap value peers, they have justified their expenses.

Additionally they are currently “cheap” on Price/Prospective Earnings and Price/Book measures, compared to the broader S&P 500 Value Index (NYSEARCA:IVE) and look poised to continue their outperform in the coming months.

P/E* 13.97 13.15 14.23 15.06
P/B 1.30 1.64 1.52 1.74
I yr return 30.80% 17.78% 21.58% 17.43%
5 yr return 234.55% 130.75% 139.03% 119.97%

*Price/Prospective Earnings source Morningstar

Guggenheim S&P 500 Pure Value ETF (NYSEARCA:RPV)

RPV tracks the S&P 500 Pure Value Index holding 111 securities in its basket. S&P 500 pure style indexes divide one third of S&P 500 market capitalization as ‘Pure Growth’ and one third as ‘Pure Value’. These two buckets have no overlapping stocks.

Value stocks are selected on the basis of three ratios: book value to price, earnings to price and sales to price. Index constituents are weighted by their style scores as opposed to market cap.  (Read: How Pure Strategies Crushed the Market)

The product investors 35 basis points a year in fees. Top sectors currently are Financials, Utilities and, Energy.

The fund was launched in March 2006 and has managed to attract about $899 million in assets so far.

The product has returned a very impressive 4.34% year-to-date compared with 3.14% for S&P 500 Value Index ETF (NYSEARCA:IVE). The performance has been nothing less than stellar over the longer term as well, with a total return of 234.55% return compared with 119.97% for IVE in the last five years.

RPV is a Zacks Rank # 2 (Buy) ETF.

PowerShares Dynamic Large Cap Value Portfolio (NYSEARCA:PWV)

PWV is based on the “Dynamic Large Cap Value Intellidex” Index that seeks to provide capital appreciation while maintaining value exposure. The index applies a 10 factor style isolation process.

After the initial value screen, the fund evaluates stocks on additional dimensions including price momentum, earnings momentum, quality and management action.

The product holds $803 million in assets, invested in 50 securities. Financials, Information Technology, Healthcare occupy the top three spots for sector exposure.

It charges an expense ratio of 59 basis points. With its consistent outperformance over other broader large cap value ETFs, with less volatility, this ETF has justified its slightly higher fee.

PWV is a Zacks Rank # 2 (Buy) ETF.

First Trust Large Cap Value AlphaDEX Fund (NYSEARCA:FTA)

FTA tracks the “Defined Large Cap Value Index” — an “enhanced” index that uses the AlphaDEX stock selection methodology to select stocks from the S&P 500 Value Index.

Stocks are ranked on value factors including book value to price, cash flow to price and return on assets and only those that receive a higher value score are eligible for inclusion in the index.

The selected stocks are divided into quintiles based on their rankings and the top ranked quintiles receive a higher weight within the index. The ETF currently holds 189 stocks.

Incorporated in 2007, FTA now manages assets of $839 million. Energy, Utilities, Consumer Discretionary, Financials and Information Technology sectors get double digit allocation within the fund.

It charges an expense ratio of 63 basis points. FTA is a Zacks Rank # 3 (Hold) ETF.

This article is brought to you courtesy of Neena Mishra From Zacks.com

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