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Is This a Better Large Cap ETF?

Eric Dutram

Large Caps have been strong performers so far in 2013, and many are expecting the gains to continue as we approach the summer months. This is especially true given the stronger tail end of the earnings season, and some more favorable data—like jobs—to open up May.

Large caps are also presenting a more reasonable value at this time, particularly when compared to small and mid cap securities. Stocks in these market levels have seen a huge run in the past six months and so some believe that larger securities could be better positioned at this time.

Plus from a fund flows look, this trend is starting to materialize. Large cap ETFs have seen billions in inflows to start the quarter (SPY has pulled in nearly $2 billion alone) while small cap funds have seen big outflows in some cases (IWM has lost about $1.4 billion).

This suggests that investors may be starting to cycle back to large caps for their exposure, and that this is where portfolios should be tilted towards by ETF investors.

Given this, investors might want to stay in the large cap ETF world and focus on funds that offer exposure to bigger securities. However, there are a bunch of options in this segment and some investors may have trouble figuring out the relatively small differences in this extremely similar corner of the ETF world (see Active Large Cap ETFs: The Best of Both Worlds?).

While there are a number of easy ways to narrow down the list, a look to the Zacks ETF Rank for guidance might also be a helpful option. By looking to this metric, investors can tap into a forward looking analysis of ETFs which seeks to find the best products in each category.

More on the Zacks ETF Rank

This approach provides a recommendation for an ETF in the context of our outlook of the underlying style box. This approach also takes into account risk preferences of investors as well.

The aim of this process is to find the best ETF within each risk category, assigning each ETF one of five ranks with 1 being Strong Buy and 5 being Strong Sell. Thus, the Zacks ETF Rank looks to reflect the expected return of an ETF relative to other ETFs with a similar level of risk (read the Zacks ETF Rank Guide).

Using this technique, we have found a few top ranked ETFs in the large cap category. But one that you may have overlooked—and that has been leading the market—is undoubtedly the PowerShares Dynamic Large Cap Value ETF (PWV).

PWV: A Better Large Cap ETF

This fund offers up solid exposure to the large cap value space by tracking the Dynamic Large Cap Value Index. This benchmark gives PWV access to about 50 companies, with assets spread out among the well-known names in this group.

However, it is worth pointing out that this fund doesn’t just invest in 50 large companies that have value characteristics, as it instead goes through a much more rigorous screening a selection process. Included in this technique are financial metrics such as price and earnings momentum, quality, management action, and value (See Time to Consider Pure Growth and Value ETFs?).

The benchmark is rebalanced and reconstituted on a quarterly basis, ensuring that no single company dominates the portfolio. However, investors should note that the fund is a bit costly thanks to this process, charging investors 59 basis points in total fees.

This compares very unfavorably with many other large cap ETFs out there, some of which, such as MGV, charge just 12 basis points a year in fees. This creates a bit of an alpha hurdle that must be passed in order to justify the added cost, though PWV has certainly accomplished this in recent trading.

In addition to possessing a solid yield of 2.2%, the ETF has crushed large cap markets in the process. The fund has beaten out SPY and more similar funds like MGV, IVE or IWD by a pretty good margin in the trailing one year time frame, with big gains in longer time periods as well.

So clearly, the fund is able to justify its higher expense ratio, at least based on this look. Plus, thanks to a solid volume level and its holding of liquid securities, there shouldn’t be much of an issue on a trading front, ensuring that bid ask spreads will be kept low here (see Try Value Investing with These Large Cap ETFs).

Bottom Line

Despite this outperformance, PWV remains relatively unloved by investors. The product has just over half a billion in assets, a fraction of many others in the space.

This is rather unfortunate, as PWV has shown itself to be a strong performer, and one that can certainly validate a higher expense ratio. So if you are in the market for a large cap value ETF, make sure to consider PWV for your exposure, as it is certainly living up to its top ETF ranking.

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Read the analyst report on PWV

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Read the analyst report on MGV

Read the analyst report on IVE

Read the analyst report on IWD

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