RZV Invesco S&P SmallCap 600 Pure Value ETF

Although concerns over the health of the international economy are easing, the markets have been a little rocky as of late. The European recovery is slowly picking up and the fate of the emerging nations is largely dependent on the extension of the Fed’s stimulus program.

On the contrary, things are shaping up well in the U.S. market with the Dow and the S&P 500 beating the 16,000 and 1,800 milestones, respectively, in November. Frequently flowing in solid data, be it on housing, labor market or manufacturing, are adding further strength to the equity market.

Notably, small cap stocks have played a vital role in carrying this bullish momentum. S&P Small Cap 600 index gained 37.8% in the year-to-date frame (as of November 29, 2013) against a 26.6% rise in the S&P 500 index.

Normally, smaller companies pickup faster than the larger ones in a growing economy. Also, with a major focus on the domestic land, smaller firms are poised to surge in a trending U.S. market against larger counterparts which generally have more global exposure. As a result we believe a pure U.S. exposure can best be achieved via these pint-sized securities.

Although small-caps have the potential to offer good returns in a trending market, these are often blamed for increasing volatility. A slight drag in the U.S. economy might disrupt the momentum. Keeping this in mind, looking for some value notions in this capitalization level, can ensure safety to investors (read: Buy This Top Ranked Small-Cap Value ETF).

The small cap value funds offer exposure to a wide variety of stocks with value characteristics, such as low P/B, low P/S and low P/E ratios, which reduce the risk quotient in a security. 

Also, while it is still unknown when the central bank will begin to slow down the bond buying program, the market is already prepared for the inevitable move. We can thus expect lesser volatility even after the step is formally taken.

Given this bullish trend, a look at some of the top ranked ETFs in the space could be a good way to target the best of the segment. One way to find a top ranked ETF in the small-cap value space is by using the Zacks ETF Ranking system (read: Zacks ETF Rank Guide).

About the Zacks ETF Rank

The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, style box or asset class see all the Zacks ETF Categories here).

Our proprietary methodology also takes into account the risk preferences of investors. ETFs are ranked on a scale of 1 (Strong Buy) to 5 (Strong Sell) while they also receive one of three risk ratings, namely Low, Medium or High.

The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of the five ranks within each risk bucket. Thus, the Zacks ETF Rank reflects the expected return of an ETF relative to other products with a similar level of risk (see more in the Zacks ETF Center).

For investors seeking to apply this methodology to their portfolio in the small-cap value space, we have taken a closer look at the top ranked RZV. This ETF has a Zacks ETF Rank of 1 or ‘Strong Buy’  and is detailed below:
 
About RZV
 
Launched in March 2006, Guggenheim S&P Smallcap 600 Pure Value (RZV) looks to track the performance of the S&P SmallCap 600 Pure Value Index. The fund has been designed to tap small cap securities of the U.S. equity market that have strong value characteristics.

The fund is one of the popular choices in the small-cap value space with about $143 million in AUM. Holding 150 stocks in its basket, the product puts only 18.4% of its total assets in the top 10 holdings, suggesting minimum concentration risk.

Sector wise, this ETF is heavy in consumer discretionary and industrials stocks, as these two account for more than 20% of the portfolio each, followed closely by information technology and financials (see the full list of top ranked ETFs).

Nevertheless, assets are well spread out across the components; none of the stocks holds more than 3.23% of the assets. Arkansas Best Corp., VOXX International and AAR Corp hold the top three positions in the basket.

The cost of the product is reasonable in the small-cap value ETF space with 38 bps of annual fees which is slightly higher than the average expense ratio (34 bps) of the space. 
 
As the name suggests, RZV’s structure follows a true value style calling for lower volatility. Notably, the fund has almost all its coverage in the U.S. which clearly explains why it can be a wise bet in a global slowdown.
 
The fund’s performance this year has been stellar, adding a little over 40% in the YTD time frame (as of December 3rd). The ETF also has a solid track record over a long time period, having posted gains of over 28% over the trailing five years. However, higher return comes at the expense of ‘high’ risk outlook.

Bottom Line

The underlying industries in the fund are showing a nice momentum presently and came up with decent corporate earnings and outlook in the latest season which should send this category to another round of rallying. Also, excessive exposure in value stocks is another positive for the fund as value stocks tend to outperform over the long term (read: Time for This Value-Focused ETF?).

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ARKANSAS BEST (ABFS): Free Stock Analysis Report
 
AAR CORP (AIR): Free Stock Analysis Report
 
GUGG-SP 600 PV (RZV): ETF Research Reports
 
VOXX INTL CP (VOXX): Free Stock Analysis Report
 
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