An Idea For A Value Rebound

The value factor has not been too bad this year, but the problem for value stocks is that they are lagging the broader market as well as their growth and momentum rivals. For example, the iShares Edge MSCI USA Value Factor ETF VLUE is up less than 9 percent year to date while the S&P 500 is higher by nearly 12 percent.

Additionally, VLUE's year-to-date returns are not even half those offered by its momentum equivalent, the iShares Edge MSCI USA Momentum Factor ETF MTUM. The laggard status of VLUE and other value ETFs this year serves as a reminder to investors consider factor-driven strategies that different factors lead in various years while others trail.

However, value stocks, historically speaking, have been durable over long holdings periods, indicating that a buying opportunity could be afoot with VLUE. That could prove particularly true as the bull market in U.S. stocks continues aging.

Finding Value With VLUE

“Value investing draws on the idea of buying companies that are priced inexpensively relative to their fundamentals,” said BlackRock in a recent note. “Value investors invest in companies with pro-cyclical business models that tend to be rewarded in market booms and over longer holding periods.”

Hallmarks of typical value strategies include large weights to the energy or financial services sectors, or both. Financials are VLUE's second-largest sector weight at 14.5 percent while energy chimes in at about 6.3 percent. The significant exposure to financials makes sense as the sector is one of a few that is one of a few that is legitimately undervalued relative to the broader market.

Perhaps surprisingly to some investors that are familiar with individual factor ETFs, VLUE allocates over 35 percent of its combined weight to the technology and consumer discretionary sectors, groups that are usually the dominant sector weights in growth and momentum ETFs.

Concentrating On Value

“Value factor investing tends to have more concentrated style exposure and stronger factor weighting than the average active value fund or market cap-weighted value index, residing on the far left-hand side of that Morningstar style box,” said BlackRock. “ETFs with this focused exposure to value can be a low-cost way to target inexpensive names, which have historically fared well when interest rates are rising.”

Apple Inc. AAPL is VLUE's largest holding at a weight of almost 10 percent. The ETF charges 0.15 percent per year, or $15 on a $10,000 investment, which represents a good value among smart beta strategies.

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