Three value investing ETFs worth considering now offer opportunities for exposure to small-cap stocks that have the potential to outperform large- and mid-cap funds.
The three value investing ETFs worth considering give investors ways to zero in on the book value-to-price ratio, earnings-to-price ratio and sales-to-price ratio in the first fund, momentum with the second one and dividends with the third. Small-cap value stocks typically grow more slowly than average companies, but they still can achieve strong returns and offer reduced risk compared to similar-sized growth stocks.
Invesco S&P SmallCap 600 Pure Value ETF (RZV)
The Invesco S&P SmallCap 600 Pure Value ETF (NYSE: RZV) tracks a fundamentally weighted index of U.S.-listed small-cap value companies. RZV provides a unique take on small- and micro-cap value exposure by focusing on undervalued stocks represented in the index it tracks.
Investors should beware that the fund’s holdings of various sizes and sectors heighten its market risk. As a result, investors interested in this high-beta play on small-cap value stocks also should expect higher transaction costs than the norm due to a modest daily volume (the number of total shares traded in each day for one stock) and sizable spreads between the bid and ask prices.
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Even so, RZV replicates its index efficiently. The fund invests at least 90% of its total assets in securities that comprise the Index, which measures the performance of small-cap equities that exhibit strong value characteristics in the S&P SmallCap 600 Pure Value Index.
This fund performed weakly in 2017 and struggled in 2018 as its total return rose 1.24% in 2017 and plunged 19.65% in 2018, according to Morningstar. Year to date, the fund’s return has risen 7.64%. The variation in its returns shows the fund’s volatility and the need for investors to be comfortable enduring such wide swings.
RZV’s value is measured by risk factors such as a stock’s book value-to-price ratio, earnings-to-price ratio and sales-to-price ratio. The fund and the Index are rebalanced annually.
The top RZV sectors include consumer cyclical, basic materials, industrials, technology and consumer defensive. Among the fund’s top 10 holdings, accounting for 19% of its portfolio, are Sonic Automotive Class A (NYSE: SAH), William Lyon Homes (NYSE: WLH), Group 1 Automotive Inc. (NYSE: GPI), Ultra Clean Holdings Inc. (NASDAQ: UCTT), Griffon Corp. (NYSE: GFF), M/I Homes Inc. (NYSE: MHO), Hibbett Sports Inc. (NASDAQ: HIBB), Meritage Homes Corp. (NYSE: MTH), Century Communities Inc. (NYSE: CCS) and GMS Inc. (NYSE: GMS).
RZV has $178.9 million in net assets and a 0.69% spread, which is the difference between the bid and ask prices of a security. The fund also has an expense ratio of 0.35%, so it's relatively cheap to hold in comparison to other exchange-traded funds.
In short, this ETF offers a distinct model for investors looking to add small-cap stocks to their portfolio. It focuses on securities that display strong value characteristics and uses an efficient index. But due to the relative volatility of small-cap stocks, investors should, as always, perform their own due diligence to decide whether this fund is suitable for their portfolios and risk tolerance.
Invesco S&P SmallCap Value with Momentum ETF (XSVM)
The Invesco S&P SmallCap Value with Momentum ETF (AMEX:XSVM), formerly the Invesco Russell 2000 Pure Value ETF is based on the S&P 600 High Momentum Value Index and chooses its stock holdings from among the listings that have the highest value and momentum scores in the index. XSVM will invest at least 90% of its total assets in the component securities that comprise the index.
While the fund changed indexes in May 2015 and again in June 2019, it remains one of the few “pure” value ETFs in the small-cap space. At one point in its history, this ETF only held about $70 million in assets. Low assets led to a low trading volume that raised transaction costs at the retail level. Even so, the fund has been able to offer a valid alternative to traditional value fund competitors to attract investors.
The top XSVM sectors include consumer cyclicals, financial services and industrials. The fund’s top 10 holdings, composing 18% of the portfolio, are Vitamin Shoppe Inc. (NYSE: VSI), Sonic Automotive Inc. Class A (NYSE: SAH), Era Group Inc. (NYSE: ERA), SpartanNash Co. (NASDAQ: SPTN), INTL FCStone Inc. (NASDAQ: INTL), Veritiv Corp. (NYSE: VRTV), Office Depot Inc. (NASDAQ: ODP), Seneca Foods Corp. Class A (NASDAQ: SENEA), Group 1 Automotive Inc. (NYSE: GPI) and TTM Technologies Inc. (NASDAQ: TTMI).
XSVM has $72.5 million in net assets and a spread of 0.44%, which shows the difference between its bid and ask prices. The fund has a 1.98% yield and a year-to-date return of 13.01%. The ETF also has an expense ratio of 0.39%, so it's relatively cheap to hold in comparison to other exchange-traded funds.
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In sum, this ETF presents a viable option for investors seeking to add a small-cap fund to their holdings, since it's one of the few possibilities for investors interested in small-cap, “pure” value funds. Investors should exercise their own due diligence in assessing whether the fund is a worthwhile investment.
ProShares Russell 2000 Dividend Growers ETF (SMDV)
The ProShares Russell 2000 Dividend Growers ETF (NYSE: SMDV) tracks an index of U.S. small-cap stocks with a 10-year record of consecutively increasing their dividends.
The stocks are equally weighted in the fund, which seeks companies that are growing their dividends. The fund can contain as few as 40 stocks, but it seeks exposure across all market sectors, as long as no single sector comprises more than 30% of the index weight.
SMDV slid 0.60% in 2018 and has jumped 9.03% in 2019.
The investment thesis of this ETF is that small stocks with a proven record of increasing dividends deliver stable growth. Thus, the fact that the fund culls only about 50 names from a broad 2,000-stock universe indicates how few make the cut. SMDV competes most directly with WisdomTree’s DGRS (NASDAQ: DGRS). However, SMDV strictly invests in stocks with growing dividends, while DGRS holds dividend-paying stocks aimed at quality and growth.
The top SMDV sectors include utilities, industrials, financial services, consumer staples and basic materials. Among the fund’s top 10 holdings, encompassing 17% of the portfolio, are Group 1 Automotive Inc. (NYSE: GPI), Gorman-Rupp Co. (NYSE: GRC), Matthews International Corp. (NASDAQ: MATW), Hillenbrand Inc. (NYSE: HI), American Equity Investment Life Holding Co. (NYSE: AEL), Inter Parfums Inc. (EPA: ITP), McGrath RentCorp. (NASDAQ: MGRC), Middlesex Water Co. (NASDAQ: MSEX), H.B. Fuller Co. (NYSE: FUL) and Universal Health Realty Income Trust (NYSE: UHT).
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SMDV has $719.4 million in net assets, a 2.01% yield and a spread of 0.10%, which indicates the difference between its bid and ask prices. The fund also has an expense ratio of 0.40%, so it's relatively inexpensive to hold compared to other specialized ETFs.
In short, the fund targets a narrow slice of the small-cap market — currently with a huge bias toward utilities — rather than broad coverage of the entire small-cap space. If you are interested in Russell 2000 equities that consistently pay rising dividends, consider SMDV as it is the only ETF I know that tracks the Russell 2000 Dividend Growth Index. However, investors should, as always, perform their due diligence to decide whether SMDV is a worthwhile investment.
Small-cap funds are more volatile than their large- and mid-cap counterparts but they also offer potential for outsized returns. For investors willing to take additional risk but still gain the benefits of value investing, these three funds are worth considering.
Jim Woods is a 20-plus-year veteran of the markets with varied experience as a broker, hedge fund trader, financial writer, author and newsletter editor. His books include co-authoring, “Billion Dollar Green: Profit from the Eco Revolution,” and “The Wealth Shield: How to Invest and Protect Your Money from Another Stock Market Crash, Financial Crisis or Global Economic Collapse.” He’s also ghostwritten many books and articles, as well as edited content for some of the investment industry’s biggest luminaries. Read more about Jim Woods.
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