Experienced advisors and investors know that there are many factor combinations to consider. ETFs amplify this proposition, as there are a slew of dedicated multifactor funds on the market today. There are also funds that blend multiple factors under one umbrella without purporting to be traditional multifactor funds. In some cases, that benefits end users. The WisdomTree U.S. Value Fund (WTV ) is an example of such an ETF.
As its name implies, WTV is a value ETF, but there’s more to the story. The fund’s point of emphasis is shareholder yield. That is the three-pronged concept comprising buybacks, debt reduction, and dividends. Each of those concepts implies a level of quality. When combined in a single strategy as does WTV, quality traits can be enhanced.
A familiar, simple premise applicable to value investing explains why the inclusion of quality is advantageous. When it comes there value, there good stocks that are inexpensive and there are value traps, the latter of which are to be avoided.
WTV Has Value Trap Avoidance Capabilities
Value stocks are those names that have become cheap for various reasons. Typically, those reasons are negative. WTV is an actively managed ETF, so it can take steps to avoid value traps.
“Blindly chasing value increases the likelihood of holding companies with deteriorating fundamentals, commonly known as ‘value traps,’ instead of undervalued businesses,” noted Morningstar analyst Mo’ath Almahasneh. “The probability of holding companies with sound financial health and enduring competitive edges decreases in the cheaper corners of the market because higher-quality companies tend to trade at higher valuations.”
WTV’s value trap avoidance capabilities are bolstered by the focus on shareholder yield. In many cases, value traps aren’t actively working to reduce debt or repurchase their own shares. If anything, plenty of value traps are heavily indebted companies that probably shouldn’t be engaging in shareholder rewards. If they are dividend payers, those payouts could eventually be endangered.
Put simply, WTV could be compelling for value investors because the ETF doesn’t blindly include cheap stocks. Rather, its shareholder yield component acts as a quality filter to keep value traps at bay.
“A myopic focus on bargain-hunting risks investors falling into value traps. However, value investing can be a worthy investing philosophy when tempered by an emphasis on financial durability and resilience,” concluded Morningstar’s Almahasneh.
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