This article was originally published on ETFTrends.com.
The value factor is accessible via a slew of ETFs. In fact, value is easily one of the most popular strategies in the smart beta space, but not all value ETFs help investors steer clear of stocks that are value traps.
The Invesco Strategic US ETF (IUS), which debuted last September as part of a broader suite of five strategic ETFs from Invesco, can potentially help investors avoid value traps. IUS has some similarities with an older, popular stablemate: the PowerShares FTSE RAFI US 1000 Portfolio (PRF) .
PRF tracks 1,000 U.S. stocks that show the highest fundamental strength based on the RAFI fundamental indexing methodology, which screens for sales, book value, cash flow and dividends.
IUS follows the Invesco Strategic US Index. That benchmark “is designed to measure the performance of high quality, large-sized US companies. The securities are assigned a business-size score based on the equally-weighted average of sales, operating cash flow, total return of capital and book value over the prior five years or life of the security,” according to Invesco.
IUS components are then assigned a quality score based on the equally-weighted average of two quality factors, efficiency calculated as the ratio of sales-to-assets in the prior year and growth calculated as the percentage change in the ratio of sales-to-assets over the prior five years.
The IUS use of the quality score “indicates how effective a firm is at generating revenue from its assets,” said Morningstar in a recent note. “The growth measure looks at the change in the sales/assets ratio over the past five years. Firms that have increased this ratio over time are doing an ever-better job of generating business from its assets, which is an indicator of the quality of the enterprise.”
IUS holds 540 stocks and there is something of value tilt in the fund. A combined 44% of the fund's holdings are classified as large-, mid- or small-cap value names, more than double the weight IUS assigns to growth stocks.
Relative to the aforementioned PRF, “IUS uses a more expansive definition of cash returned to shareholders, looking at dividends and share repurchases as opposed to just dividends as PRF does,” said Morningstar.
IUS charges just 0.19% per year, or $19 on a $10,000 investment.
For more information on alternative index-based strategies, visit our Smart Beta Channel.
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