How to Add Value to a Diversified Investment Portfolio

Value-focused exchange traded fund strategies can add, well, value, to any investment portfolio.

In the recent webcast, Exploring the Benefits and Uses of Value Strategies, Nick Kalivas, Head of Factor and Core Equity Product Strategy, Invesco, highlighted a few reasons why investors have been looking back into the value style.

For example, many have seen the appeal of buying inexpensive assets trading below intrinsic value. There has been a large run-up in mega cap growth stocks, which fueled the need to diversify concentration in market caps while stretching market valuations. Additionally, the cyclical recovery and expected benefit of a normalized economy post-COVID-19 helped support the value story.

Even after the recent run in the value style, Kalivas pointed out that value is still inexpensive relative to growth based on price-to-earnings and price-to-sales ratios.

Looking ahead, rising industrial production could continue to favor value over growth as the economic recovery further picks up pace, Kalivas added.

As investors consider the value style, Craig Lazzara, Managing Director, Global Head of Index investment Strategy, S&P Dow Jones Indices, explained that value scores are determined by a combination of earnings/price, book/price, and sales/price. However, there are a number of ways the different indexing methodologies could tweak the value criteria. For example, the S&P 500 Value Index may even include stocks that appear in both the growth and value categories. On the other hand, the S&P 500 Pure Value Index, is a more focused approach to the value factor. When compared to the S&P 500 Value Index, the S&P 500 Pure Value Index has three times more value exposure.

To better-focus on the value play, Kalivas pointed to the Invesco S&P 500 Pure Value ETF (RPV), which follows the S&P 500 Pure Value Index. RPV provides pure value exposure with the potential to enhance portfolio outcomes across market cycles and when value is in favor. It offers portfolio diversification whereby the pure value exposure leads to more robust portfolio diversification. Additionally, the ETF provides efficient implementation of value factor budget, helping investors access more value with less cash.

Kalivas believes that there are four potentially effective ways to implement RPV into a diversified portfolio. Investors can use RPV to create a more robust “barbell” approach to value and growth, utilize RPV to reach intended value exposure by leaving excess funds for investing in other core or satellite strategies, complement factor exposure to strengthen portfolio core through an additional factor lens, and increase exposure to cyclical sectors.

Additionally, Kalivas argued that the Invesco S&P 500® Equal Weight ETF (RSP) can provide attractive value for investors. The expense ratio of RSP is 75% less than its peers. RSP can diversify market cap-weighted core equity strategy, complement a large cap growth equity strategy, and replace high-fee or underperforming active strategies.

Financial advisors who are interested in learning more about value strategies can watch the webcast here on demand.