Investors who like more stable companies with a sustainable competitive advantage may seek out diversified, value-oriented exchange traded fund options.
For instance, the iShares MSCI USA Value Factor ETF (NYSEArca: VLUE) tracks the cheapest stocks in each sector and also tilts toward less traditional value plays, like technology stocks.
The ETF includes a 20.0% position in information technology, 16.5% financials, 15.7% health care, 13.2% consumer discretionary, 9.7% industrials, 9.1% consumer staples, 7.4% energy, 3.0% utilities, 3.0% materials and 2.2% telecom.
“Stocks are weighted according to both their market-capitalization and the strength of their value characteristics, rescaled to maintain sector neutrality,” writes Alex Bryan, an equity strategist for Morningstar. “This approach allows the fund to maintain a deeper value tilt than many of its market-cap-weighted value index peers, despite having greater exposure to traditional growth industries.”
Specifically, VLUE screens a stock’s value relative to sector peers, so stocks from varying sectors are placed on a level field, according to Bryan. For example, a tech stock that looks cheap relative to its sector peers could pass VLUE’s screens, whereas an energy stock with even lower absolute valuations may not pass the test.
“Valuations may be more comparable within the same industry than across industries, which may give the fund cleaner exposure to stocks that are truly cheap relative to their peers,” Bryan added.
While the sector-neutral approach may help shield an investor against unintended exposure, VLUE will be more exposed to prevailing market moves – if a sector is richly valued, the ETF could have a greater tilt toward the area than other market-cap-weighted value indices. Additionally, VLUE does not necessarily go bottom fishing with downtrodden sectors.
Value investing is a popular long-term investment strategy. Value stocks have historically outperformed growth stocks, or companies with high earnings expectations, in almost every market over the long-haul. For instance, the MSCI USA Value Index has outperformed the MSCI USA Growth Index by an annualized 81 basis points since 1974 through September 2015.
ETF investors also have a number of value options at hand. The Schwab U.S. Large-Cap Value ETF (NYSEArca: SCHV) is the cheapest option with a 0.07% expense ratio, and the Vanguard Value ETF (NYSEArca: VTV) is another cheap option with a 0.09% expense ratio. Both SCHV and VTV track some the cheapest U.S. large-cap stocks on the market and weight holdings based on market capitalization.
For S&P 500 index exposure, the Guggenheim S&P 500 Pure Value ETF (NYSEArca: RPV) targets the cheapest third of the benchmark.
Additionally, while the PowerShares FTSE RAFI US 1000 Portfolio (NYSEArca: PRF) does not seek to target value stocks, the RAFI fundamental indexing methodology, which screens for sales, book value, cash flow and dividends, does target companies with relatively cheap valuations and trims exposure to pricier stocks.
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Max Chen contributed to this article.