ETFs Apply Value in Varying Fashion

Conventional wisdom dictates that, over the long-term, value stocks outperform. Well, the length of the current bull market in U.S. stocks qualifies as “long-term,” and for much of this move higher, value stocks have been trailing their growth counterparts.

Exchange traded funds emphasizing value stocks are among the largest single-factor strategies on the market today, underscoring investors’ affinity for value stocks. However, investors should note different value ETFs screen for value in a variety of ways.

Popular value ETFs include the iShares MSCI USA Value Factor ETF (Cboe: VLUE). VLUE “seeks to track the performance of an index that measures the performance of U.S. large- and mid-capitalization stocks with value characteristics and relatively lower valuations, before fees and expenses,” according to iShares.

Another Value Play

The Invesco S&P 500 Pure Value ETF (NYSEArca: RPV), which tracks value stocks taken from the S&P 500 index, is another value ETF that has managed to deliver strong long-term returns. Still, historical data points suggest some value strategies can suffer significant drawdowns during bear markets.

“These funds had some of the deepest drawdowns during the market downturn in early 2009. RPV was down from its nearby peak as much as 70% in February 2009 compared with 51% for the Vanguard Total Market ETF (VTI),” said Morningstar. “As the recovery progressed, these deep value funds continued to be among the most volatile in the large-value category.”

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 since investors expect the rapid growth in those company measures, but more are growing wary of high valuations.