There has been plenty of chatter regarding the struggles of the value factor, but heading into 2019, some market observers forecast a value resurgence. Through September 2018, the preceding decade represented the worst 10-year stretch for value stocks.
However, with value stocks expected to bounce back, investors may want to consider exchange traded funds that offer unique approaches to value, including the WisdomTree Earnings 500 Fund (NYSEArca: EPS).
EPS, which turns 12 years old next month, was among the first alternative index based or what we now consider smart beta index ETFs that helped provide investors an alternative to traditional market capitalization-weighted indices.
EPS targets an earnings-weighted index that screen for positive cumulative earnings over their most recent four fiscal quarter period and assigns weights to components to reflect the proportionate share of the aggregate learning’s each company generated, so those with greater earnings have larger weights. That gives the fund value and quality tilts.
“In 616 of the 679 10-year periods from 1926 through to the end of 1992, the cheap stocks outperformed the expensive stocks, with the median performance advantage greater than 500 basis points (bps) per year,” said WisdomTree in a note out Thursday. “But recent returns have been trending down as we saw earlier with the recent single worst decade for low-P/B stocks compared to high-P/B stocks.”
Evaluating EPS ETF
EPS holds nearly 500 stocks, but its sector weights differ from those of the S&P 500. As is the case with many value funds, the largest sector weight in EPS is financial services. That sector commands over 22% of the fund’s weight. Technology and healthcare stocks combine for almost 31% of the fund’s roster. EPS’s overweight in technology stocks relative to other value strategies is a potential benefit for investors.
“It was primarily sector tilts that caused the lagging performance for Russell Value. P/B sorting of the market as a value strategy results in chronic sector tilts, particularly toward Financial stocks and away from Technology stocks,” according to WisdomTree. “On average, the Russell 1000 Value Index has been overweight Financials by 11%, and underweight Information Technology by 10% over last decade.”
Over the past three years, EPS is up 49.30% compared to 41.90% for the Russell 1000 Value Index.
For more information on alternative index-based strategies, visit our Smart Beta Channel.