Mid caps are quietly delivering for investors this year. Value stocks are doing the same, but in more overt fashion. Combine the two and the outlook is bright for assets like the Invesco S&P MidCap 400 Pure Value ETF (RFV).
Up 27% year-to-date, RFV tracks the S&P MidCap 400® Pure Value Index. That’s a stellar performance, but it shouldn’t imply that value’s run is over. In fact, some market observer’s believe at least a pair of signs indicate value has more room to rally.
“First, the relative forward price-to-earnings (P/E) ratio of value has been trading at a near record discount versus growth,” notes Invesco’s Kevin Holt. “Furthermore, the projected earnings growth for value stocks is expected to outpace growth stock earnings by 700 basis points in 2021 and 400 basis points in 2022.”
Within RFV, “value is measured by the following risk factors: book value-to-price ratio, earnings-to-price ratio and sales-to-price ratio,” according to Invesco.
Why RFV’s Working
RFV’s components have an average market capitalization of under $5 billion, and just two of those holdings command weights north of 2%, indicating single stock risk is benign in the exchange traded fund.
On the surface, it may be easy to attribute RFV’s run to cyclical sector exposure, but there are other factors to consider regarding value’s renaissance.
“There’s a common perception that value investing is strictly about cyclical sectors, but that’s not the case,” says Holt. “At its core, value investing is about looking at the cash flows of a company and using all the information at hand to put a value on that company. I don’t love particular sectors — I love discounted cash flows. So, as the defensive/stable areas of the market become more compelling to us, we will look to opportunistically increase exposure.”
RFV allocates over 36% of its roster to financial services stocks. Mid cap financials are often regional banks and insurance providers – the very type of companies that are positively correlated to rising Treasury yields.
Th fund also devotes 20% of its weight to consumer discretionary names – a sector benefiting from government stimulus and a buoyant U.S. economy, which grew at a 6.4% clip in the first three months of 2021.
RFV charges 0.35% per year, or $35 on a $10,000 investment.
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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.