A Valuable Value ETF Against Growth, Momentum Rivals

With the value factor expected to rebound this year against its growth and momentum rivals, investors may want to consider exchange traded funds focusing on value stocks, including the Schwab U.S. Large-Cap Value ETF (NYSEArca: SCHV).

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, especially as the U.S. equities market moves toward the ninth year of an extended bull run.

SCHV charges just 0.04% per year, or $4 on a $10,000 investment, making it one of the cheapest value ETFs on the market. Investors can realize additional cost savings with SCHV by trading the ETF on Schwab’s ETF OneSoure platform, the largest commission-free ETF menu in the brokerage industry. SCHV follows the Dow Jones U.S. Large-Cap Value Total Stock Market Index.

SCHV could benefit as interest rates rise “because guess what sector makes up the largest percentage of SCHV’s portfolio – Financials. This means SCHV has a nice built-in hedge to rising rates, since over 20% of its assets may actually perform better as rates rise, which is not the case for a lot of funds out there,” according to a Seeking Alpha analysis of the ETF.

Value stocks have historically outperformed growth stocks, or companies with high earnings expectations, in almost every market over the long-haul. For instance, the MSCI USA Value Index has outperformed the MSCI USA Growth Index by an annualized 81 basis points since 1974 through September 2015.

“SCHV is going to have a place in most investment portfolios this year, as the market’s incredible run should have some investors thinking about taking some risk off the table,” according to Seeking Alpha. “While SCHV will most likely never be a high flyer, the fund is made up of major companies that have been increasing their dividends, trade at more reasonable valuations, and stand to benefit from recent tax reform. With the S&P 500 trading at a P/E of over 26, well above its historical mean, SCHV is much cheaper, with a P/E ratio around 20.”

For more on Smart Beta ETFs, visit the Smart Beta Channel home page.