Value stocks have historically outperformed growth stocks, or companies with high earnings expectations, in almost every market over longer periods. In their attempts to better measure market returns, Eugene Fama and Kenneth French, both professors at the University of Chicago Booth School of Business, have found that value outperformed growth stocks and small-caps tend to outperform large-caps over the long-term as outlined in their Fama-French Three-Factor Model.
“Deep value investing is not for the weak-hearted. The strategy performance has its ups and downs which is reflected in its risk. The RPV has 50% higher standard deviation than the average fund in the large-cap value category and 58% higher than S&P 500. It also has a beta of 1.41 versus 1.01 for the average large cap value fund,” according to a Seeking Alpha analysis of RPV.
The value play may be seen as a basic type of enhanced or smart beta ETF strategy that specifically targets value stocks that tend to trade at a lower price relative to fundamentals, like dividends, earnings and sales. Along with the simple pure value play, such as RPV, the other value-focused ETFs may also incorporate other factors in their screening process.
“On the flip side, the pure value strategy has weaker correlation to the broad market. It’s R2 is equal to 79.7%, which can add some diversification benefits next to a broadly diversified portfolio,” adds Seeking Alpha. “Despite its higher volatility, RPV outperformed the large cap value category on risk-adjusted basis. It’s 10-year Sharpe Ratio is 0.4 versus 0.37 for the category.”
• Earn up to 5 CE Credit! Registration is open for the 2017 ETF Trends Virtual Conference on Wednesday, Feb. 8. To register or learn more, visit www.etftrendsvirtual.com.