A Better Way To Play Value With ETFs

The resurgence of the value factor this year has gotten plenty of attention, prompting scores of advisors and investors to revisit previously beloved exchange-traded funds dedicated to the value factor.

So far, the move back to value ETFs is rewarding investors. For example, the popular iShares S&P 500 Value Index (ETF) IVE is up 1.2 percent year-to-date, while the S&P 500 is higher by just 0.8 percent. Benzinga forecast the resurgence of the value factor and the relevant exchange-traded funds. That resurgence has been on display this year as investors are eschewing growth and momentum for value. Investors should consider boosting exposure to the value factor now before it gets too hot and they chase value when it is no longer offering, well, value.

However, that does not mean the standard value ETFs are the perfect avenues for exploiting this widely followed investment factor. Like other asset classes, value ETFs should not be seen as risk-free bets. In fact, there are some obvious risks associated with standard value ETFs at the moment, namely these ETFs' often significant combined allocations to the financial services and energy sectors.

Related Link: A Value ETF That Merits Further Examination

“There is a possibility that the recent outperformance of value stocks was driven by a deeply oversold bounce in energy and this has the potential to be a 'junk rally.' Energy and commodity related areas of the market could remain extremely volatile and investors should be careful about blindly seeking 'value',” said State Street Vice President David Mazza in a recent note.

SDY Offers Value, Too

Another way of accessing value stocks without making a big bet on energy names is via dividend growth stocks and the corresponding ETFs. That includes the popular SPDR S&P Dividend (ETF) SDY, one of the largest U.S. dividend ETFs.

SDY only holds stocks that a have a minimum dividend increase streak of 20 years. Due to the fact that the energy sector has been home to the bulk of negative U.S. dividend action for over a year, the sector's weight in SDY has dwindled to just over 3 percent. Eight sectors command larger weights n the ETF than energy.

Another critical element with dividend growth stocks is that these stocks perform notably less poorly during bear markets. According to State Street data, the average drawdown for the S&P 500 during its worst 15 months is almost 7.6 percent but the average drawdown for SDY's underlying index during those months was less than 5.8 percent.

“Also, an emphasis on dividend growers can provide access to areas of the market that offer a relatively lower volatility profile and have exposure to attractively valued segments, while offering some growth potential due to their long history of paying dividends and managing balance sheets. The idea is to not pay too much for this quality growth,” added Mazza.