Last year, the story was all about traders taking on as much risk as possible to keep up with a fast-moving market. In 2014, we've seen a significant shift in momentum from high-growth areas to value opportunities. This has been precipitated by an increase in overall volatility that has prompted investors to take a second look at more defensive areas of the market. In addition, there has been a transition to large-cap stocks that are considered to be more stalwart during periods of uncertainty.
A graphical representation of this shift is best illustrated in a chart of the iShares S&P 500 Value Index ETF
(NYSEARCA:IVE) versus the iShares S&P 500 Growth Index ETF
Since the beginning of March, we've seen the momentum in value stocks far surpass their growth-oriented peers. This move is characteristic of a shift to steadfast dividend-paying companies such as utilities, telecommunications, and even large-cap technology firms with cash-rich balance sheets. Many of these companies are focused on returning value to shareholders through dividend payouts and share buybacks.
One ETF that provides unique exposure to value stocks is the First Trust Large Cap Value Opp Fund
(NYSEARCA:FTA). This fund takes a fundamental approach to its index construction methodology, which includes ranking stocks by price momentum, sales growth, book value, cash flow, and return on assets. The end result is a portfolio of nearly 200 large-cap stocks that are ranked highest according to their fundamental scores. The top three holdings in FTA include Staples
(NASDAQ:SPLS), Intel Corporation
(NASDAQ:INTC), and Quest Diagnostics Inc.
So far, the results of this enhanced index have been impressive. According to recent fund company data, FTA has outperformed the S&P 500 Value Index consistently over time (including at the one-, three-, and five-year marks), which earned it a five-star rating from Morningstar.
Another interesting value-seeking ETF with an international tilt that was just released last month is the Cambria Global Value ETF
(NYSEARCA:GVAL). This fund takes a much broader approach to constructing its portfolio by scanning 45 developed and emerging market nations according to their proprietary long-term valuation metrics. It then selects 100 stocks to include in the fund with market capitalizations over $200 million.
The portfolio managers for GVAL argue that most investors take a home-country bias when constructing their asset allocation that underweights exposure to many attractive overseas opportunities. One of the benefits of this ETF is that it seeks to identify some of the cheapest or oversold markets according to its index constraints. Right now, the top country weightings include Brazil, Ireland, and Austria.
Because this ETF is so new, it remains to be seen how the strategy will perform versus more traditional global-value competitors. GVAL may be susceptible to periods of higher volatility because of its exposure to a variety of market caps, along with its unique country selections. However, this ETF does offer a diversified approach that finds companies trading at deep discounts to their intrinsic market value. That's an appealing proposition for true value-seeking investors.
Read more from David Fabian, Managing Partner at FMD Capital Management:
6 Traits of Successful ETF Investors
5 Key Strategies for ETF Growth Investors
A Discounted Infrastructure Fund With A 6.75% Yield
No positions in stocks mentioned.