Back to top

Image: Bigstock

How to Play Stock Rotation With Value ETFs

Read MoreHide Full Article

The latest rally in the U.S. stock market powered by global easing policies has led to stock market rotation from the high-valuation growth stocks to more steady companies with lower valuations. This is evident from the iShares Edge MSCI USA Value Factor ETF (VLUE - Free Report) improvement of 7.7% so far this month against a loss of 1.2% for iShares Edge MSCI USA Momentum Factor ETF MTUM (read: Momentum ETFs & Stocks in Focus as Trump Delays Tariff Hike).

According to Bespoke Group, this indicates that investors are anticipating a rise in rates. Analysts are of the opinion that interest rates have bottomed for now as sentiments regarding the trade tensions have improved. Notably, the 2-year and 10-year U.S. Treasury yields rose to six-week high while 30-year bond yield advanced to a five-week high.

The shift from growth stocks toward value investing also highlights an anticipation of a downturn in the stock market. It signals investor concerns regarding a downturn, even as the major bourses are just within the striking distance of its recent peak. This is because if interest rates rise after hitting the bottom, it will hurt high growth stocks with high P/E ratios by diminishing the future value of earnings and raising borrowing costs.

Per portfolio manager at Lazard Asset Management, value stocks have not been this cheap since 1999. Its relative valuation has hit record lows of late, to the point that some mean reversion was likely. Despite the positive development on trade front, the United States and China are still slated to levy duties on each other’s goods in the coming weeks in phases. Increased tariffs will continue to weigh on the global growth and thus raised the appeal for value stocks (read: A Spread of Top-Ranked Value ETFs for the Current Market).

Further, value stocks by definition are undervalued and have low price-to-earnings or price-to-book value ratio. These stocks might see their price rise when market rallies.

How to Play?

Investors seeking to participate in this market transformation, which J.P. Morgan called a “once in a decade opportunity,” could consider the ETFs that gained most over the past week. We have highlighted the five top performing value ETFs that are at the forefront of the current stock rotation and are not confined to a particular sector or an industry:

Invesco S&P SmallCap 600 Pure Value ETF RZV

This fund provides exposure to the pure value segment of the small-cap market by tracking the S&P SmallCap 600 Pure Value Index. It has a well-diversified portfolio of 168 stocks with each security holding less than 2.7% of assets. The product has been able to manage $186.6 million in its asset and charges 35 bps in fees per year from investors. It has jumped 10.4% in a week and has a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: Small-Cap Value ETFs Rallying Hard: Here's Why).
Invesco S&P SmallCap Value with Momentum ETF XSVM

This fund offers exposure to the companies having the highest "value scores" and "momentum scores" by tracking the S&P 600 High Momentum Value Index. It holds a basket of 119 stocks with each accounting for less than 3.5% of assets. The ETF has accumulated $78 million in its asset base and charges 39 bps in annual fees. It trades in light volume of 5,000 shares per day on average. XSVM is up 8.4% in a week.

Invesco S&P MidCap 400 Pure Value ETF RFV

This fund provides pure exposure to the mid-cap value segment of the U.S. equity market by tracking the S&P MidCap 400 Pure Value Index. With AUM of $157.8 million, it holds 93 stocks in its basket with each making up for less than 3% share. The product charges 35 bps in fees per year and trades in average daily volume of 17,000 shares. It has risen 6.7% in a week and has a Zacks ETF Rank #3 with a High risk outlook.

Deep Value ETF DVP

This ETF offers exposure to undervalued dividend paying stocks in the S&P 500 with solid balance sheets, earnings and strong free cash flow. It tracks the performance of the Deep Value Index, charging investors 59 bps in annual fees. The product is home to 20 stocks with none accounting for more than 9.3% of the assets. It has amassed $300.4 million in its asset base and trades in a lower volume of 30,000 shares a day. The fund gained 6.3% in the same time frame and has a Zacks ETF Rank #3 with a High risk outlook.

Invesco S&P 500 Enhanced Value ETF SPVU

This fund follows the S&P 500 Enhanced Value Index, which measures the performance of stocks in the S&P 500 Index that have the highest value score. It holds 99 stocks in its basket with each comprising for less than 5.7% share. The ETF has accumulated $66.5 million in AUM while trades in light average daily volume of 12,000 shares. It charges 13 bps in annual fees and is up 4.5% in a week. The product has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook (read: 5 Beaten Down ETFs & Stocks to Buy Now).

Want key ETF info delivered straight to your inbox?

Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>

In-Depth Zacks Research for the Tickers Above

Normally $25 each - click below to receive one report FREE:

iShares MSCI USA Value Factor ETF (VLUE) - free report >>