It’s well-documented that over the past decade the S&P 500 Growth Index is crushing its value counterpart. Likewise, value’s outperformance has been sporadic at best, vexing many devotees of the factor along the way.
Still, some market observers believe value can have its day or days again, but if that happens, investors may want to take a fresher approach to the fact with the Principal Contrarian Value Index ETF (NasdaqGM: PVAL).
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.
“But value stocks can also be cheap for a reason. Buying high price-to-earnings-multiple growth stocks over the past decade has been a winning strategy,” reports Nicholas Jasinski for Barron’s. “The technology-heavy group’s consistent business growth during the longest economic expansion in U.S. history allowed the denominator to keep up with the soaring numerator.”
PVAL Potential
What makes the Principal ETF alluring for value hunters is that it eschews the typical price-to-book and price-to-earnings ratios approach to value in favor of seeking deep value by emphasizing book yield.
Underscoring the case for PVAL today, there are incredible opportunities for investors to jump into equities while the default maneuver in today’s market landscape is heading into safe-haven assets like bonds or precious metals. Investors, however, could be missing out.
“With a recession looming, the kinds of companies that can keep growing regardless of the backdrop tend to outperform, while those that have other issues or depend on economic factors they can’t control tend to stay depressed,” according to Barron’s.
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 24% of its weight to industrial stocks and its second-largest sector weight 15.36% to technology, which is high relative to traditional value ETFs.
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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.