This Value ETF Gained 22% In 2017

Last year was hard on value stocks, but not all exchange traded funds dedicated to the value factor turned in tepid performances. For example, the  iShares Edge MSCI USA Value Factor ETF VLUE gained 22 percent, outpacing the S&P 500 Value Index by 670 basis points.

With U.S. stocks trading at elevated valuations, some market observers expect the value factor to rebound this year. That prediction has some merit because the value factor historically performs well after a slump. Ideally, investors embrace value stocks when those stocks are offering legitimate value. Arguably, that is the case today, but as VLUE proved last year, different value strategies lead to different returns.

VLUE, which tracks the MSCI USA Enhanced Value Index, holds 150 stocks. The ETF is CFRA Research's focus ETF for the month of January. 

Insider VLUE's Strategy

"VLUE holds what index provider MSCI thinks are the most attractively valued stocks in each sector, and is more diversified than most value strategies,” Todd Rosenbluth, CFRA's director of ETF and mutual fund research, said in a Monday note. “But to keep the value focus, the ETF is rebalanced semiannually, most recently at the end of November. International Business Machines Corp. IBM was one of the 16 additions and joined Apple Inc. AAPL and Intel Corp. INTC as large-cap technology constituents CFRA viewed as attractively valued; assessing likely future prospects of underlying holdings is one way CFRA’s proprietary ETF rankings provide a forward-looking perspective, unlike any other ETF ranking methodology.”

Underscoring its value proposition, VLUE sports a price-to-earnings ratio of just over 16, while the S&P 500 trades at 24 times earnings, by some estimates.

"Overall, VLUE’s recent holdings are viewed as attractively valued based on CFRA STARS and CFRA Fair Value metrics,” said Rosenbluth.

Interesting Sector Weights

Today, many value ETFs are heavily allocated to the financial services and energy sectors, while many growth funds rely heavily on technology and consumer discretionary stocks. While financials are VLUE's second-largest sector weight at 14.4 percent, the ETF devotes 36.4 percent of its combined weight to technology and consumer discretionary stocks.

VLUE's 2017 gain “was even more impressive relative to the average large cap value mutual fund, which was up just 15.8 percent last year,” said Rosenbluth. VLUE charges just 15 basis points, 88 basis points less than the net expense ratio of the average peer mutual fund.

CFRA rates VLUE Overweight, the highest rating the research firm applies to ETFs.

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