Reflation trade. Reopening trade. Whatever the preferred buzz phrase of 2021 is, investors can tap into those themes with the value factor and exchange traded funds, such as the Invesco S&P 500® Pure Value ETF (RPV).
While the value trade is retreating a bit, that could be more opportunity than a reason to eschew the factor because the broader economic environment is still conducive to value, and the factor’s resurgence, if past precedent proves accurate, could still have plenty of room ahead of it.
Companies are sporting stronger balance sheets. So are consumers. Add those two elements together, and some market observers see reasons to be constructive on value.
“As a result of this increased spending activity, certain companies stand to benefit from potential growth in their earnings (e.g., more investment and consumer spending results in higher earnings). In particular, companies whose stocks are deemed ‘value stocks’ may perform well, which investors may want to consider allocating to in their portfolio,” according to Invesco research.
RPV for Outperformance
RPV tracks the S&P 500 Pure Value Index. That’s meaningful for multiple reasons. First, that benchmark isn’t just a carbon copy of other well-known value indexes. Second, those differences can be meaningful to investors’ outcomes.
“The S&P 500 Pure Value index has outperformed both the S&P 500 Value Index and the S&P 500 Index,” adds Invesco. “Why? Because, not all value is created equally, and the S&P 500 Pure Value strategy gives you almost 2x the amount of value exposure versus the traditional value index.”
RPV’s deep value approach is rooted in holdings’ book-value-to-price ratio, earnings-to-price ratio, and sales-to-price ratio. Those metrics are applied to S&P 500 components, as are three growth metrics. In simple terms, what comes back are value and growth stocks with “the ratio between the growth score and the value score is used to rank each stock as either deep value, blend or deep growth,” according to Invesco.
The deep value names make the cut for admittance to RPV. Proving that it’s something of an exclusive club relative to rival value ETFs, RPV has 120 holdings compared to 433 in funds tracking the traditional S&P 500 Value Index.
Although its lineup is smaller than competing funds, the single stock risk is minimal in RPV as none of its holdings exceed a weight of 2.33%. Additionally, the fund isn’t large-cap heavy. In fact, mid-caps account for over 57% of the ETF’s weight compared to about 38% for large caps.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.