As is the case with traditional broad market funds, sector exposures are vital in explaining the returns and volatility characteristics of factor-based strategies, including value ETFs.

With that in mind, the Principal Contrarian Value Index ETF (NasdaqGM: PVAL) may be an appropriate way for investors to play a value resurgence without taking on excessive exposure to financial services stock, a group that usually dominates old guard value ETFs.

Banks and insurance providers are under duress this year because the Federal Reserve cut interest rates to near-zero to prop the economy up in the wake of the coronavirus.

PVAL Could Standout

Banks rely on interest rates for profits and naturally, the higher, the better. The problem for banks is that their profit margins could suffer if they are paying out deposit rates at a higher level than market rates. Their earnings are also damaged when the spread between short-term and long-term rates flattens.

With the Federal Reserve having pared interest rates to near zero, concerns are mounting about banks’ net interest margins and whether those depressed margins could affect shareholder rewards, including buybacks and dividends. Bankers typically make their money off the difference between long-term loans and deposits, underscoring investors’ apprehension about the industry right now.

In other words, low interest rates could be a disadvantage for investors considering funds that benchmark the S&P 500 Value Index, the S&P 500 Pure Value Index and the Russell 1000 Value Index.

“Unfortunately, financial stocks have been a far cry from winners recently. The sector’s performance was on par with the broader index in 2019, but has remained largely flat over the past few weeks even as the broad market continued to rally,” reports Evie Liu for Barron’s.

The financial services exposure for those benchmarks ranges from 21% to 33%. Conversely, PVAL’s allocation to that sector is 13.58%, which is in line with the S&P 500. PVAL’s 15.26% weight to technology stocks is also overweight the weight to that sector found in the aforementioned indexes.

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.

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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.