Market Overview

Where Value Stocks Are Working

Where Value Stocks Are Working

It may be easy to attribute the recent rally in small-cap stocks and exchange traded funds on growth and momentum names, but some evidence suggests the value factor is alive and well with small-caps, too.

The Invesco S&P SmallCap 600 Pure Value ETF (NYSE: RZV), for example, was one of just a handful of ETFs to hit record highs last Friday.

What Happened

If RZV's name or ticker ring a bell for some investors, it's with good reason. The ETF is known for being one of the best-performing funds, regardless of asset class, during the current bull market in U.S. stocks.

RZV is bolstering that reputation this year with a gain of 11 percent, putting it 70 basis points ahead of the Russell 2000 Index. RZV, which turned 12 years old earlier this year, tracks the S&P SmallCap 600 Pure Value Index.

Why It's Important

The fund's underlying index “measures the performance of securities that exhibit strong value characteristics in the S&P SmallCap 600 Index. Value is measured by the following risk factors: book value-to-price ratio, earnings-to-price ratio and sales-to-price ratio,” according to Invesco.

Underscoring the point that value is working with small-caps this year while continuing to falter with large-caps, RZV is up 11 percent while the large-cap S&P 500 Value Index is lower by 1.7 percent. Over the past two years, RZV is up 43.4 percent, an advantage of more than 1,700 basis points over the S&P 500 Value Index.

What's Next

The Invesco fund holds 165 stocks, a smaller roster than what's found on conventional broad-based small-cap funds and one that confirms that point that many smaller stocks aren't considered value names. Although RZV is a value fund, the ETF allocates over 35 percent of its weight to consumer discretionary stocks, a sector not often considered a value destination.

That's more than double the ETF's second-largest sector weight, industrials. Many of RZV's consumer discretionary holdings are brick-and-mortar retailers, indicating the ETF is levered to rebounds in those stocks, but also potentially vulnerable to store closures and slumping retail sales, should those scenarios appear.

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