It appears as though, once again, the economic outlook is
clouded by global events. European markets remain weak thanks to
the ongoing debt debacle while recent reports out of the U.S.
aren’t exactly favorable thanks to lower than expected levels of
job and GDP growth.
However, as we saw in the first part of the year, equities can
still do pretty well in this environment and with the low interest
rates currently being offered, stocks still seem like a good pick
for most of an investor’s capital. Yet the higher levels of
uncertainty could mean that investors might want to look at large
caps for the vast majority of their exposure, and especially so in
the value space.
Securities in the large cap segment tend to be the most stable
but can still offer price appreciation opportunities as well.
Furthermore, by honing in on value stocks in this capitalization
level, even more safety can be assured to investors (read more on
ETFs at the Zacks ETF Center).
This strategy can reduce overall volatility and can be the
perfect choice for investors who are concerned about the market’s
direction but still want some equity exposure, albeit in the safest
securities possible.
While you can do this with individual securities, there are
number of value-focused large cap ETFs which could be a better
choice. These funds offer exposure to a wide variety of stocks with
value characteristics—such as low P/B and low P/E ratios,
eliminating company specific risk in the process (also see Mid Cap
ETF Investing 101).
In this space, investors have a wealth of choices at their
disposal. While many of the funds in the large cap value ETF
segment have similar names, there are actually a great deal of
differences which investors should be aware of.
Below, we highlight six of the most popular and unique products
in this segment and discuss some of the key factors that investors
should keep in mind when looking at this intriguing corner of the
stock market:
Russell 1000 Value Index Fund (IWD)
Easily the biggest and most popular large cap value ETF, IWD has
over $12 billion in AUM and sees volume approach 1.9 million shares
on a regular basis. The ETF holds over 650 securities in its basket
and charges investors a low 20 basis points a year in costs.
The value ETF tracks the Russell 1000 Value Index which
represents approximately 50% of the total market cap of the Russell
1000 Index. Top sectors include financials, health care and
utilities, while materials, staples, and tech are relatively
underweight (see The Ten Biggest U.S. Equity Market ETFs).
In terms of individual securities, GE takes the top spot at just
under 3% while it is closely trailed by Chevron, AT&T, and
Pfizer. Dividends are also strong in this value fund as the product
pays out about 2.2% on a regular basis, about 30 basis points
higher than what investors see in broad S&P 500 focused
funds.
Vanguard Value Index Fund (VTV)
For investors who put a premium on low expenses, VTV will be
tough to beat in the large cap value space. The product charges
investors just 12 basis points a year in fees, the lowest not only
in the category but among the cheapest in the broader ETF industry
at large as well. Furthermore, since the product has nearly $6
billion in AUM and volume of 430,000 shares, Thanks to this, bid
ask spreads are tight, ensuring that total costs are very low.
In terms of holdings, this product has just over 400 securities
in its basket with a focus on financials, energy and health care.
Among the sectors that the security is light in include; basic
materials, telecoms, and cyclical consumer stocks.
From a top individual security perspective, oil giants
XOM and CVX take the top two
spots and are trailed by GE, T, and PG. Investors should also note
that the ETF pays out a robust dividend of about 2.5% a year, far
higher than many other products in the space.
PowerShares Dynamic Large Cap Value Fund (PWV)
For a more ‘dynamic’ approach to large cap value ETF investing,
PowerShares’ PWV could be a great pick. The product follows the
Dynamic Large Cap Value Intellidex Index which looks to provide
investor with a more fundamental approach to value investing.
This is done by breaking down securities via a 10-factor model
and then evaluating companies based on a variety of metrics
including momentum, earnings momentum, quality, management action,
and value. With this approach, the company looks to provide
investors with a better picture of the value investing landscape in
the large cap space.
However, the approach comes with a cost, as the product charges
investors a relatively high 61 basis points a year in fees.
Furthermore, the basket isn’t too deep as just 51 securities are in
the ETF while dividends are reasonable at about 2.2% per year (read
the Complete Guide to Preferred Stock ETF Investing).
In terms of exposure, the fund is similar, but not identical, to
others in the space. Health care takes the top spot, followed by
consumer staples and utilities, while industrials, consumer
cyclical, and telecom make up the three smallest sectors. Top
individual holdings include a familiar list as JPM, PFE, and ABT
are the three largest firms in the popular value ETF.
First Trust Large Cap Value AlphaDEX Fund (FTA)
Currently, one of the more expensive ETFs in the large cap value
segment is First Trust’s FTA. The product charges investors 70
basis points a year in fees although it does have solid volume and
a tight bid ask spread.
However, while the product may be somewhat expensive, it
arguably has one of the more in-depth methodologies in place for
selecting securities. The ETF tracks the Defined large Cap Value
Opportunities index which uses the AlphaDEX methodology to assign
weights and select stocks.
This process ranks stocks on a variety of growth and value
factors and assigns them ranks based on these results. Then the 25%
lowest ranking stocks are eliminated from the basket while the
remaining 75% is divided into quintiles. The highest rated quintile
receives the biggest weighting but all stocks in the quintiles
receive an equal weight.
With this process, the ETF holds 220 stocks in its basket and
has a focus on energy, utilities, and tech firms. Meanwhile, the
product is light in telecom, health care, and consumer staples
(also read, the Comprehensive Guide to Utility ETFs).
While this might sound intriguing, investors should also note
that the fund only puts 58% in large caps, suggesting it might not
be the best pure play on the space. Additionally, the wider
dispersion of company size, as well as the quasi equal weight
methodology, may make the fund hard to compare to other value
products in the space.
Guggenheim S&P 500 Pure Value ETF (RPV)
One of the major criticisms of value and growth ETFs is the
overlap between the two styles. Often times, companies can find
their way into both value and growth products in a particular
market cap segment since they can often be classified as ‘blend’
securities with both value and growth characteristics.
RPV seeks to end these worries by following the S&P 500
Citigroup Pure Value Index. This index divides up the securities
into value or growth without any overlap between the two allowed.
This helps to ensure that only those with a true value profile are
included although it does result in a smaller overall basket of
securities.
After all, this ETF only has 117 securities in its basket
although assets are well spread out among these firms. However, the
product is still heavily concentrated from an industry perspective
as financials account for about two-fifths of the exposure,
followed by consumer cyclical and energy at about 10% each. On the
flip side, telecom, utilities and basic materials lag in terms of
overall exposure.
Investors should also note that the fund isn’t the most popular
in the space although volume is decent at about 28,800 shares a
day. This suggests relatively modest bid ask spreads although they
will be wider than other less ‘pure’ products in the space (also
see ETFs vs. ETNs: What’s The Difference?).
Additionally, expenses are higher than the broader products,
coming in at 35 basis points a year although this is far less than
most of the fundamental products on this list. Unfortunately
though, the yield on this fund—about 1.5%-- is pretty low when
compared to others on the list, suggesting that while it is a great
pick on pure value securities it might not be the best source of
income for investors in the large cap value ETF space.
PowerShares Fundamental Pure Large Value Portfolio
(PXLV)
For investors who like the idea of a fundamental approach but
are often scared off by the higher fees, PXLV could be an
interesting alternative. The product charges investors just 39
basis points a year despite using a fundamental approach.
In fact, the fund follows the RAFI Fundamental Large Value Index
which looks to break the link between price and weight. This is
done by looking at various stats beyond market cap to weight
securities, including dividend to market value, sales growth, book
value, and cash flow. Additionally, much like RPV, this fund
promises to have no overlap among its value and growth
securities.
However, this does produce a relatively concentrated fund as
only 90 securities are in the basket while the top three securities
account for nearly 20% of assets. Furthermore, from an industry
look, financials make up 30% of the fund while energy account for
another 20% (read ETFs vs. Mutual Funds).
Investors should also note that although the product is
relatively cheap compared to other fundamental products, the volume
is quite low. Average daily levels rarely exceed 7,500 shares a
day, producing relatively wide bid ask spreads. Thanks to this,
total costs in this fund may be more than what some investors are
expecting, although they are likely to still be lower than other
fundamental ETFs.
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