Three ETFs for Value Investors
Investors that favor value over growth have a plethora of options with ample upside potential in the current market environment.
US stocks have performed quite well through the first two-and-a-half months of 2013, but what may come as a surprise to some is the outperformance of so-called value sectors.
As measured by some major sector ETFs, funds such as the Consumer Staples Select Sector SPDR (NYSEARCA:XLP) and the Health Care Select Sector SPDR (NYSEARCA:XLV) have been leaders this year.
The Technology Select Sector SPDR (NYSEARCA:XLK), though it is up year-to-date, cannot be accurately described as a market leader. All of that is to say investors have shown a distinct preference for value names over growth fare to this point in 2013.
Inflows to low volatility ETFs affirm that assertion. So do massive one-day creations in a pair of popular dividend ETFs.
On Wednesday alone, the Vanguard High Dividend Yield ETF (NYSEARCA:VYM) raked in $1 billion in new assets while the iShares High Dividend Equity Fund (NYSEARCA:HDV) added $281 million in fresh cash, according to Index Universe data.
Fortunately, investors that favor value over growth have a plethora of options with ample upside potential in the current market environment.
WisdomTree Total Dividend Fund (NYSEARCA:DTD): The WisdomTree Total Dividend Fund is not the largest dividend on the market, but it has been growing at a decent clip. DTD had $282.6 million in assets at the end of January and that total is now over $294.4 million. More importantly, DTD has returned nearly 3% in the past month and almost 7% year-to-date.
At the sector level, DTD does a good job of mixing together less volatile groups with higher beta fare as financials, staples, technology and health care occupy four of the five largest sector weights within the ETF.
There are some other traits about DTD that conservative investors will like. Since the fund's index was born in mid-2006, it has outperformed the Russell 3000 Index (INDEXRUSSELL:RUA) and the Russell 3000 Value Index (INDEXRUSSELL:RAV) while sporting a lower beta and lower standard deviation, according to WisdomTree data. DTD also pays a monthly dividend.
First Trust Large Cap Value AlphaDEX Fund (NYSEARCA:FTA): FTA does not weight its 207 constituents based on market value or dividend yield. Rather, First Trust takes "the stocks from the S&P 500 Value Index (INDEXSP:SP500V) against all the stocks in the S&P 500 Index (INDEXSP:.INX) on growth factors including three, six and 12-month price appreciation, sales to price and one year sales growth, and separately on value factors including book value to price, cash flow to price and return on assets," according to FTA's website.
Clearly, there are some growth traits factored into FTA's screening process and that means FTA is slightly more volatile than its name might imply. FTA has a three-year standard deviation of 16.85% compared to 16.17% for the S&P 500 Value Index. However, over the past three months, three years and five years, FTA's underlying index has outperformed the S&P 500 and the S&P 500 Value Index, according to First Trust data.
Energy stocks account for 20.4% of FTA's weight, by far the largest sector weight. Top non-energy holdings include Dell (NASDAQ:DELL), Xerox (NYSE:XRX), and Gannett (NYSE:GCI). The rub with FTA is a 0.7% annual expense ratio, which is high for this genre of ETFs.
PowerShares Dynamic Large Cap Value Portfolio (NYSEARCA:PWV): Considering that it just turned eight years old and that it has almost $533 million in assets under management, the PowerShares Dynamic Large Cap Value Portfolio does not get much attention. PWV's index applies "a rigorous 10 factor style isolation process to objectively segregate companies into their appropriate investment style and size universe," according to PowerShares.
From there, potential constituents for the ETF are evaluated on earnings momentum and quality, management, value and other factors. The result is PWV looks a lot like the Dow Jones Industrial Average, at least among its top-10 holdings as nine are Dow stocks with Wells Fargo (NYSEARCA:WFC) being the outlier. Overall, the ETF is home to 14 Dow stocks.
PWV is the type of ETF an investor can hold for extended time frames and its performance proves as much. Since its March 2005 debut, PWV has surged over 61%. The SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA) is up 37.2% over the same time.
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