Many factor-based strategies, including supposedly docile value funds, haven’t provided investors with much shelter from the March equity market storms, but that could also be creating opportunity. The Principal Contrarian Value Index ETF (NasdaqGM: PVAL) could be one way for investors to capitalize on a value resurgence.
The Contrarian Value Index ETF will try to reflect the performance of the Nasdaq U.S. Contrarian Value Index, which includes companies taken from the Nasdaq US Large Mid Cap Index but follows a quantitative model designed to identify those that appear undervalued by the market relative to their fundamental value.
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, but that trend reversed in a big way during the 2010s decade.
Recipe Matters
With traditional value still struggling, due in large parts to significant allocations to the energy and financial services sector, PVAL could be better-positioned to rebound than old guard rivals. For example, the Principal ETF allocates just over 17% of its weight to the energy and financial stocks.
Specifically, PVAL’s underlying index will screen for book yields of the securities for the last 28 quarters where it will determine a market condition of “bear market” or “normal market.” In a bear market, securities in the top 30% by book yield are selected for the Index. In a normal market, the initial book yield rankings are adjusted using calculations related to leverage, twelve-month price volatility, and forward earnings dispersion as of the most recent quarter-end; those in the top 30% based on the adjusted rankings are selected for the Index, according to the issuer.
PVAL allocates over 38% of its weight to the industrial and technology sectors and its almost 15% weight to tech stocks is comparatively high against the category average.
Home to 270 stocks, PVAL is classified as a mid-cap value fund, a potentially potent combination should value bounce back.
Mid-cap companies are slightly more diversified than their small-cap peers, which allows many mid-sized companies to generate more consistent revenue and cash flow, along with providing more stable stock prices. The mid-cap category has also outperformed their larger peers, but with lower volatility than small caps. Moreover, the returns of mid-cap stocks have also beaten those of small-cap stocks during the trailing three-, five-, and 10-year periods, with lower volatility.
For more on multi-factor strategies, visit our Multi-Factor Channel.
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.