Aside from the obvious of rising prices for the related stocks and exchange traded funds, one of the positives stemming from this year’s value stock resurgence is that investors are being reminded that not all value funds are alike.
In fact, many aren’t even distant cousins. The Invesco S&P 500 Pure Value ETF (RPV ) proves there are advantages to a deeper, more pure approach to value investing. The Invesco ETF is up 26.5% year-to-date compared to a gain of 19% for the S&P 500 Value Index.
“Value funds favor statistically cheaper stocks to faster-growing, more richly valued firms. Tilting toward cheaper companies has historically been tied to market-beating returns, and numerous strategic-beta funds aim to systematically capture this effect,” says Morningstar’s Ben Johnson.
Active risk, or how different a fund is from a benchmark, is an issue worth examining with regard to RPV. As noted above, the ETF is significantly outpacing the S&P 500 Value Index this year, and this year isn’t a one-off, either. Over the past three years, RPV and the S&P 500 Value Index aren’t in the same ballpark, and from 2015 to 2020, the closest RPV and the S&P 500 Value Index were in performance terms was a 120-basis point difference in 2016.
“Active risk indicates how different a portfolio is from a benchmark,” adds Johnson. “High-active-risk funds may out- or underperform the benchmark by a wide margin; low-active-risk funds mostly hew close. Investors who are adamant that their chosen factors will outperform would likely opt to shoulder more active risk.”
One way of looking at that take on active risk is that if an investor has strong conviction value is poised to outperform, outcomes can potentially be improved by RPV’s value purity relative to competing strategies. How that purity is arrived at isn’t hard to explain.
RPV “only admits stocks that rank in the S&P 500’s cheapest third and whose value scores exceed the average constituent of the S&P 500 Value Index,” notes Johnson.
RPV has little overlap with the S&P 500 – just 15%. Not surprisingly, its sector weights look nothing like the S&P 500, as confirmed by an almost 45% allocation to bank stocks.
Another benefit offered by RPV is that because it weights stocks based solely on value traits, it’s not wed to market cap, meaning it can include some smaller stocks. Roughly two-thirds of RPV’s components are mid- or small-cap names, including a 51.5% tilt to mid-cap value stocks.
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