Time for This Top Ranked Large Cap Value ETF
The uncertainty surrounding a possible cut in the Fed’s monetary stimulus is looming large across the globe, resulting in market volatility. Though small caps are leading the way higher so far, it appears that the large caps are poised to become strong performers in the remainder of the year (read: Time for This Top Ranked Small Cap ETF?).
This is especially true given the stronger tail end of the earnings season, favorable job data, a recovering housing market and increasing consumer spending. Large caps seem to be more reasonably valued at this time and offer higher price appreciation particularly when compared to small and mid cap securities.
Additionally, this trend has started to materialize from the start of the third quarter from a fund flows look. Notably, the most popular large cap ETF (SPY) pulled in nearly $4 billion compared to $2.5 billion for mid cap (IJH) and under $2 billion for small cap (IWM) counterparts.
This suggests that investors are cycling back to large caps, which tend to be the most stable, for their exposure in an uncertain environment. Furthermore, investors should focus on value stocks in this capitalization level to earn more safety and assured returns (read: 3 Ultra Cheap ETFs for Value Investors).
The large cap value funds offer exposure to a wide variety of stocks with value characteristics, such as low P/B, low P/S and low P/E ratios, which reduce company specific risks. Further, according to various academic studies, value stocks have outperformed the growth ones over the long term and delivered higher returns with lower volatility.
Given this, a look at the top ranked ETFs in the space, with a lower level of risk, could be a good idea for investors, especially those concerned about the market direction, given concerns over the Fed’s QE program. One way to find a top ranked ETF in the large cap value space is by using the Zacks ETF Ranking system (read: Zacks ETF Rank Guide).
About the Zacks ETF Rank
A look at the top ranked large cap value ETFs can be done by using the Zacks ETF Rank. This technique provides a recommendation for the ETF in the context of our outlook of the underlying industry, sector, style box or asset class. Our proprietary methodology also takes into account the risk preferences of investors.
The aim of our model is to select the best ETFs within each risk category. We assign each ETF one of five ranks within each risk bucket. Thus, the Zacks ETF Rank reflects the expected return of an ETF relative to other ETFs with a similar level of risk.
Using this strategy, we have found an ETF – iShares NYSE 100 ETF (NY) – in the space that has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating with a ‘Low’ risk outlook (read: all the Top Ranked ETFs). The details of this interesting fund are highlighted below:
NY in Focus
This overlooked ETF offers exposure to the large cap value sector of the U.S. equity market, by tracking the NYSE U.S. 100 Index. Holding 101 stocks in its basket, the fund provides a nice balance across each security and prevents heavy concentration.
The product puts nearly 30% in the top 10 holdings with Exxon Mobil (XOM), Johnson & Johnson (JNJ) and General Electric (GE) as the top three holdings. These have decent Zacks Ranks as well and collectively make up for 11.4% of total assets in the basket. Other securities do not account for more than 3% of assets.
In terms of sectors, financials take the top spot at roughly one-fifth of the total, followed by modest allocations to oil & gas, industrials and health care. The fund is light on materials and utilities, as these account for roughly 5% of the total combined (read: 3 Surging Financial ETFs Beating the Market).
The product so far has managed $57.8 million in its asset base and trades in a paltry volume of roughly 2,000 shares per day. This suggests that bid ask spreads may be a tad wider, and that total costs may come in higher than the 20 bps expense ratio. However, the underlying liquidity of the securities involved ensures that this will not be much of a problem overall.
Further, the ETF is less volatile as indicated by the annualized standard deviation of 12% and beta of 0.98. Not only has NY delivered impressive returns of nearly 20% over the trailing one-year period, it has also shown a strong run-up in its prices this year, gaining nearly 16.7% so far in the time frame. Further, the ETF yields a decent dividend of 2.27% annually.
Bottom Line
This ETF has been overlooked by investors in the large cap space, though it has delivered strong returns over the long term (read: all the Large Cap ETFs here). The fund is a bit costly when compared to other choices in the space, while volume isn’t great, though neither should be a big problem considering its performance history.
So, investors looking for the large cap value ETF should consider NY for their exposure, as it is a top rated ETF that is poised to lead the way higher in the coming months, especially if the focus returns to large cap stocks.
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Read the analyst report on JNJ
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