Smart Beta Channel

A Smart Beta ETF That Enhances Value

There are scores of exchange traded funds dedicated to the value factor on the market today. The PowerShares S&P 500 Value Portfolio (NYSEArca:SPVU) is one of the overlooked value options, but the fund is worth a look by value investors.

SPVU tracks the S&P 500 Enhanced Value Index, which focuses on 100 S&P 500 companies with the greatest value score calculated based on fundamental ratios of a company’s book value-to-price ratio, earnings-to-price ratio and sales-to-price ratio.

“Also important to note is the weighting mechanism employed by the two indices.  The S&P 500 Value simply weights securities by market cap, whereas the selection process and the weighting scheme of the S&P 500 Enhanced Value Index assigns higher weights to those securities with bigger value attributes,” according to S&P Dow Jones Indices.

Value stocks usually trade at lower prices relative to fundamental measures of value, like earnings and the book value of assets. On the other hand, growth-oriented stocks tend to run at higher valuations.

The value factor historically performs well over longer holdings, but a current challenge is the dearth of U.S. stocks considered credible value plays. The financial services sector is one of a small number of groups considered legitimate value destinations at the moment.

“The S&P 500 Enhanced Value Index is more representative of a high conviction, more concentrated value strategy.  In that light, it is worthwhile to compare the returns of the value indices to those of actively managed large-cap value managers,” according to S&P Dow Jones.

Related: Smart Beta ETFs: The “Dream Diet” for Your Portfolio

SPVU holds 99 stocks, over 41% of which hail from the financial services sector. Consumer staples and consumer discretionary names combine for almost 28% of the ETF’s weight. At 12.8%, healthcare is the ETF’s only other double-digit sector allocation.

“Across all measurement horizons, more than half of the active large-cap value funds have trailed the two value indices.  It comes as no surprise that the percentage of active value funds underperforming the S&P 500 Enhanced Value Index tends to exceed those underperforming the broad-based S&P 500 Value across all time periods, given that the former has outperformed the latter across all measurement periods,” according to S&P.

Over 82% of SPVU’s holdings are large-caps and the biggest weights assigned to those holdings are around 4%.

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