Two Popular Factors, One ETF

Momentum and value are two of the most popular investment factors. Scores of exchange traded funds offer access to momentum and value stocks, with many of these funds isolating the factors, though there are multifactor ETFs that feature both momentum and value stocks.

The PowerShares S&P 500 Value With Momentum Portfolio SPVM combines momentum and value stocks, an interesting concept when considering the conventional wisdom surrounding these investment factors. Momentum investing is based on the premise that stocks that are rising can continue doing so while those that are declining can keep falling. On the other hand, value investing is rooted in identifying undervalued stocks.

SPVM, which is about 10 months old, tracks the S&P 500 High Momentum Value Index. The index takes the 200 S&P 500 stocks with the most favorable value scores and whittles that group down to the 100 stocks with the best momentum traits.

Economic Data: Good For SPVM

Recent economic data, particularly inventories data, could bode well for strategies such as the one put forth by SPVM.

“Historically, a declining growth rate in the inventories-to-sales ratio has coincided with increased economic output,” PowerShares said in a recent note. “Declining inventories relative to sales indicate that demand is outstripping supply — signaling companies to boost production. The opposite is also true. Rising inventories relative to sales can be interpreted as a sign that demand is weak — potentially signaling the need for companies to reduce production.”

SPVM's focus on value and momentum can lead to some large sector weights, as highlighted by the ETF's more than 45-percent weight to financial services stocks. That is more than quadruple the ETF's 9.7-percent allocation to consumer discretionary stocks, its second-largest sector exposure. SPVM also devotes 9.5 percent to the industrial sector, underscoring its cyclical tilt.

A Compelling Alternative

Valuation metrics indicate SPVM is a compelling alternative to traditional broad market exposure at this stage of the U.S. bull market.

SPVM “has a price-to-earnings ratio of 13.78, which is 25 percent lower than the S&P 500 Index,” said PowerShares. “Moreover, SPVM’s low price/earnings to growth ratio indicates that its valuation is more attractive than the S&P 500 Index. As of Jan. 26, the PEG ratio for SPVM was 1.32, compared with 1.77 for the S&P 500 Index.”

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