It appears as though, once again, the economic outlook is clouded by global events. European markets remain weak thanks to the ongoing debt debacle while recent reports out of the U.S. aren’t exactly favorable thanks to lower than expected levels of job and GDP growth.
However, as we saw in the first part of the year, equities can still do pretty well in this environment and with the low interest rates currently being offered, stocks still seem like a good pick for most of an investor’s capital. Yet the higher levels of uncertainty could mean that investors might want to look at large caps for the vast majority of their exposure, and especially so in the value space.
Securities in the large cap segment tend to be the most stable but can still offer price appreciation opportunities as well. Furthermore, by honing in on value stocks in this capitalization level, even more safety can be assured to investors (read more on ETFs at the Zacks ETF Center).
This strategy can reduce overall volatility and can be the perfect choice for investors who are concerned about the market’s direction but still want some equity exposure, albeit in the safest securities possible.
While you can do this with individual securities, there are number of value-focused large cap ETFs which could be a better choice. These funds offer exposure to a wide variety of stocks with value characteristics—such as low P/B and low P/E ratios, eliminating company specific risk in the process (also see Mid Cap ETF Investing 101).
In this space, investors have a wealth of choices at their disposal. While many of the funds in the large cap value ETF segment have similar names, there are actually a great deal of differences which investors should be aware of.
Below, we highlight six of the most popular and unique products in this segment and discuss some of the key factors that investors should keep in mind when looking at this intriguing corner of the stock market:
Easily the biggest and most popular large cap value ETF, IWD has over $12 billion in AUM and sees volume approach 1.9 million shares on a regular basis. The ETF holds over 650 securities in its basket and charges investors a low 20 basis points a year in costs.
The value ETF tracks the Russell 1000 Value Index which represents approximately 50% of the total market cap of the Russell 1000 Index. Top sectors include financials, health care and utilities, while materials, staples, and tech are relatively underweight (see The Ten Biggest U.S. Equity Market ETFs).
In terms of individual securities, GE takes the top spot at just under 3% while it is closely trailed by Chevron, AT&T, and Pfizer. Dividends are also strong in this value fund as the product pays out about 2.2% on a regular basis, about 30 basis points higher than what investors see in broad S&P 500 focused funds.
For investors who put a premium on low expenses, VTV will be tough to beat in the large cap value space. The product charges investors just 12 basis points a year in fees, the lowest not only in the category but among the cheapest in the broader ETF industry at large as well. Furthermore, since the product has nearly $6 billion in AUM and volume of 430,000 shares, Thanks to this, bid ask spreads are tight, ensuring that total costs are very low.
In terms of holdings, this product has just over 400 securities in its basket with a focus on financials, energy and health care. Among the sectors that the security is light in include; basic materials, telecoms, and cyclical consumer stocks.
From a top individual security perspective, oil giants XOM and CVX take the top two spots and are trailed by GE, T, and PG. Investors should also note that the ETF pays out a robust dividend of about 2.5% a year, far higher than many other products in the space.
For a more ‘dynamic’ approach to large cap value ETF investing, PowerShares’ PWV could be a great pick. The product follows the Dynamic Large Cap Value Intellidex Index which looks to provide investor with a more fundamental approach to value investing.
This is done by breaking down securities via a 10-factor model and then evaluating companies based on a variety of metrics including momentum, earnings momentum, quality, management action, and value. With this approach, the company looks to provide investors with a better picture of the value investing landscape in the large cap space.
However, the approach comes with a cost, as the product charges investors a relatively high 61 basis points a year in fees. Furthermore, the basket isn’t too deep as just 51 securities are in the ETF while dividends are reasonable at about 2.2% per year (read the Complete Guide to Preferred Stock ETF Investing).
In terms of exposure, the fund is similar, but not identical, to others in the space. Health care takes the top spot, followed by consumer staples and utilities, while industrials, consumer cyclical, and telecom make up the three smallest sectors. Top individual holdings include a familiar list as JPM, PFE, and ABT are the three largest firms in the popular value ETF.
Currently, one of the more expensive ETFs in the large cap value segment is First Trust’s FTA. The product charges investors 70 basis points a year in fees although it does have solid volume and a tight bid ask spread.
However, while the product may be somewhat expensive, it arguably has one of the more in-depth methodologies in place for selecting securities. The ETF tracks the Defined large Cap Value Opportunities index which uses the AlphaDEX methodology to assign weights and select stocks.
This process ranks stocks on a variety of growth and value factors and assigns them ranks based on these results. Then the 25% lowest ranking stocks are eliminated from the basket while the remaining 75% is divided into quintiles. The highest rated quintile receives the biggest weighting but all stocks in the quintiles receive an equal weight.
With this process, the ETF holds 220 stocks in its basket and has a focus on energy, utilities, and tech firms. Meanwhile, the product is light in telecom, health care, and consumer staples (also read, the Comprehensive Guide to Utility ETFs).
While this might sound intriguing, investors should also note that the fund only puts 58% in large caps, suggesting it might not be the best pure play on the space. Additionally, the wider dispersion of company size, as well as the quasi equal weight methodology, may make the fund hard to compare to other value products in the space.
One of the major criticisms of value and growth ETFs is the overlap between the two styles. Often times, companies can find their way into both value and growth products in a particular market cap segment since they can often be classified as ‘blend’ securities with both value and growth characteristics.
RPV seeks to end these worries by following the S&P 500 Citigroup Pure Value Index. This index divides up the securities into value or growth without any overlap between the two allowed. This helps to ensure that only those with a true value profile are included although it does result in a smaller overall basket of securities.
After all, this ETF only has 117 securities in its basket although assets are well spread out among these firms. However, the product is still heavily concentrated from an industry perspective as financials account for about two-fifths of the exposure, followed by consumer cyclical and energy at about 10% each. On the flip side, telecom, utilities and basic materials lag in terms of overall exposure.
Investors should also note that the fund isn’t the most popular in the space although volume is decent at about 28,800 shares a day. This suggests relatively modest bid ask spreads although they will be wider than other less ‘pure’ products in the space (also see ETFs vs. ETNs: What’s The Difference?).
Additionally, expenses are higher than the broader products, coming in at 35 basis points a year although this is far less than most of the fundamental products on this list. Unfortunately though, the yield on this fund—about 1.5%-- is pretty low when compared to others on the list, suggesting that while it is a great pick on pure value securities it might not be the best source of income for investors in the large cap value ETF space.
For investors who like the idea of a fundamental approach but are often scared off by the higher fees, PXLV could be an interesting alternative. The product charges investors just 39 basis points a year despite using a fundamental approach.
In fact, the fund follows the RAFI Fundamental Large Value Index which looks to break the link between price and weight. This is done by looking at various stats beyond market cap to weight securities, including dividend to market value, sales growth, book value, and cash flow. Additionally, much like RPV, this fund promises to have no overlap among its value and growth securities.
However, this does produce a relatively concentrated fund as only 90 securities are in the basket while the top three securities account for nearly 20% of assets. Furthermore, from an industry look, financials make up 30% of the fund while energy account for another 20% (read ETFs vs. Mutual Funds).
Investors should also note that although the product is relatively cheap compared to other fundamental products, the volume is quite low. Average daily levels rarely exceed 7,500 shares a day, producing relatively wide bid ask spreads. Thanks to this, total costs in this fund may be more than what some investors are expecting, although they are likely to still be lower than other fundamental ETFs.
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Read the analyst report on IWD
Read the analyst report on VTV
Read the analyst report on PWV
Read the analyst report on FTA
Read the analyst report on RPV
Read the analyst report on PXLV
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Read the analyst report on IWD, VTV, PWV, FTA, RPV, PXLV
