The value factor is lagging growth and momentum this year, but some value ETFs are delivering solid performances.
One example is the Schwab U.S. Large-Cap Value ETF (NYSEArca: SCHV), which is up 9.5% year-to-date and resides near record highs.
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.
“For perspective, the S&P 500 is currently trading at a price to earnings (P/E) ratio over 25, which is above its mean of 15. This means the market’s valuation is getting stretched, even if it is for good reasons like a growing economy, which we currently have. By comparison, SCHV has a current P/E of just over 19,” according to a Seeking Alpha analysis of SCHV.
One of the reasons SCHV is inexpensive relative to broader benchmarks is its large positions in financial services stocks, one of a small amount of sectors in the U.S. trading at noticeable discounts to long-term averages. Financials are 20.1% of SCHV’s weight, the ETF’s largest sector allocation.
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For all the talk about technology being richly valued, SCHV offers a surprise with a 16.1% allocation to that sector. The $3.7 billion ETF holds nearly 360 stocks. With its large weight to financial stocks, SCHV could benefit from rising interest rates.
“This appears to be materializing, at least in the short-term. While the outlook for 2018 is murky, investors seem pretty convinced that another rate hike from the Fed will be coming in December this year. According to CME Group, which tracks the futures market for investor sentiment on interest rate movements, the probability of a rate hike in December currently stands at 83%,” according to Seeking Alpha.
Consumer staples and healthcare stocks combine for almost 24% of SCHV’s roster. 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, one of the largest commission-free ETF menu in the brokerage industry.
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