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RPV Is A Strong ETF For Exposure To The Value Portion Of SPY

Summary The performance of the ETF has been fairly solid. The standard deviation gives it some risk, but not too much. The holdings of the ETF are at least adequately diversified and I like the positions. The decent liquidity doesn’t hurt when investors want to rebalance their portfolios. The Guggenheim S&P 500® Pure Value ETF (NYSEARCA: RPV ) has surprised me. With a higher turnover ratio and expense ratio, the fund has thoroughly outperformed SPY since inception. During the time frame I used for my regression, RPV was up 119% relative to the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) being up 96%. Impressive work and great for the people that decided to buy into it when the ETF started. What does RPV do? RPV attempts to track the investment results of S&P 500 Pure Value Index. The ETF falls under the category of “Large Value” presently, but was classified under “Mid-Cap Value” previously. The category may be prone to change as the ETF has a 25% portfolio turnover. Does RPV provide diversification benefits to a portfolio? Each investor may hold a different portfolio, but I use SPY as the basis for my analysis. I believe SPY, or another large cap U.S. fund with similar properties, represents the reasonable first step for many investors designing an ETF portfolio. Therefore, I start my diversification analysis by seeing how it works with SPY. The correlation is about 88.86%, which is low enough to allow more diversification benefits than I would expect in a fund referencing the S&P 500. Standard deviation of monthly returns (dividend adjusted, measured since March, 2006) The standard deviation is terrible. If investors want to ensure that they are keeping volatility out of their portfolio, this won’t be the ETF. That’s a little ironic to me because over long sample periods I wouldn’t expect a value ETF to show so much more volatility than SPY. For the period I’ve chosen, the standard deviation of monthly returns was 7.021%. For SPY, it was 4.416% over the same period. Mixing it with SPY I also run comparison on the standard deviation of monthly returns for the portfolio assuming that the portfolio is combined with the S&P 500. For research, I assume monthly rebalancing because it dramatically simplifies the math. With a 50/50 weighting in a portfolio holding only SPY and RPV, the standard deviation of monthly returns across the entire portfolio is 5.566%. If the position in SPY is raised to 80% while RPV is used at 20% the standard deviation of monthly returns drops down to 4.824%. In practice, I think the best way to use RPV is a position smaller than 20% and used in a diversified portfolio. The moderate correlation makes a strong case for using RPV in a small position so the volatility has less impact on the overall portfolio. At 5%, the standard deviation of the portfolio would have been 4.510%. Compared to SPY at 4.416%, this is a fairly low increase in the risk level measured by the standard deviation. Why I use standard deviation of monthly returns I don’t believe historical returns have predictive power for future returns, but I do believe historical values for standard deviations of returns relative to other ETFs have some predictive power on future risks and correlations. Yield & Taxes The distribution yield is 1.98%. It’s a little on the low side for the value focus, but not too low if it is only being considered for a portion of the portfolio. Due to the higher volatility of returns on this “value” ETF, I really appreciate seeing a higher distribution yield. The major risk, in my opinion, is that investors tend to withdraw their money at the worst possible times. Expense Ratio The expense ratios are both running .35%. It isn’t too bad and seems to be the standard for Guggenheim ETFs. I’d prefer lower, but this is still within reason. Market to NAV The ETF is trading at a .06% discount to NAV currently. I think any ETF is significantly less attractive when it trades above NAV and more attractive below NAV. A .06% discount is not enough to matter though. Investors should check prior to placing an order, but the liquidity in RPV should be a great hedge against any meaningful premiums or discounts. Lately there have been more than 120,000 shares trading hands each day. With each share over $50, the resulting liquidity is enough that I would have no concerns. Largest Holdings The diversification is pretty good. I see nothing to complain about here. (click to enlarge) Conclusion RPV delivers a strong showing in my initial assessment. The liquidity is excellent and the correlation is about what I would expect for the ETF having a focus on the S&P 500 index. The performance was fairly solid over the test period in every regard. The biggest weakness would have to be the volatility of returns, but that sure won’t stop the ETF from reaching the next stage. The Guggenheim S&P 500 Pure Growth ETF (NYSEARCA: RPG ) tracks the other side of the index, having a focus on growth stocks. The interesting thing is over the last five years both RPV and RPG significantly outperformed SPY. If we limit the comparison to the last 5 years, SPY was up 111.5%, RPG was up 148.2% and RPV was up 134%. When I looked up the ETF they were holding 119 of the constituents of the S&P 500. Frequently the contenders for the value exposure in my portfolio will have fairly strong dividend yields. The yield on RPV isn’t that strong, but that seems like a fairly minor issue for me since I don’t anticipate any withdrawals from the portfolio for a long time. Within the 119 companies, the diversification isn’t bad. Only one holding was over 2.02% and I can’t complain about the selections. All around, I feel like this is a fairly solid group of companies the ETF is holding. The expense ratio is not too bad, cheaper than most though a certainly higher than my goals. I’m certainly willing to deal with that if the ETF fits nicely into my overall portfolio. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis.

3 Incredible Value ETFs For Outperformance

While the U.S. stock market has shown strong resilience this year overcoming a mountain of woes, it might be on a tough ride in the months ahead. This is because rate hike now seems much closer given the robust job market and a slew of better-than-expected economic data. Inflation – an important factor in raising rates – has also started picking up slowly. In addition, lofty stock valuations, a strong U.S. dollar, an aging bull market, fading consumer confidence, slowdown in China, sluggish growth in emerging markets and Greece failure to reach a debt deal with its international creditors are weighing on investors’ sentiments, keeping the stock prices at check. Further, a sharp rise in Treasury yields in recent weeks has tempered the appeal for riskier investments as a higher borrowing cost would eat away corporate profits and hurt economic recovery. Apart from these, last week, the World Bank lowered the global growth forecast from 3% to 2.8% for this year, citing that lower commodity prices and interest rate hike risk would severely crimp growth in developing markets. The bank also downgraded its growth outlook for the world’s largest economy to 2.7% from 3.2%. Amid these uncertainties, value investing appears safe and appealing to investors. The strategy includes stocks with strong fundamentals – earnings, dividends, book value and cash flow – that trade below their intrinsic value and are undervalued by the market. Why Value Investing A Better Play? Value stocks often overreact to both positive and negative news, resulting in share price movement that does not reflect the company’s true long-term fundamentals. This creates buying opportunities in such stocks at depressed prices and provides potential for capital appreciation when the stock finally reflects its true market price. As a result, value stocks have the potential to deliver higher returns and exhibit lower volatility compared to growth and blend counterparts. In fact, these stocks outperform the growth ones across all asset classes when considered on a long-term investment horizon and are less susceptible to trending markets. Given this, investors may want to consider a nice value play in the current volatile market environment. While looking at individual companies is certainly an option, a focus on cheap value ETFs could be a less risky way to tap into the same broad trends. Below we have highlighted three ETFs with favorable Zacks Rank of #1 (Strong Buy), 2 (Buy) or 3 (Hold) with a Medium risk outlook that look most attractive in terms of valuation (P/E) compared to the P/E 17.09 for the broader iShares S&P 500 Value ETF (NYSEARCA: IVE ). Any of these could make for a compelling choice for a long-term portfolio. Guggenheim S&P 500 Pure Value ETF (NYSEARCA: RPV ) This ETF offers pure exposure to the large-cap value segment of the U.S. equity market by tracking the S&P 500 Pure Value Index. The fund is widely diversified across 119 securities as none of these make up for more than 2.18% of total assets. From a sector look, the ETF is heavily concentrated on financials at 34.7% while energy and consumer discretionary round off the top three spots with double-digit allocation each. The product has accumulated around $1 billion in AUM and trades in volumes of around 190,000 shares per day on average. Expense ratio came in at 0.35%. The fund has a P/E ratio of 14.73 and has added about 1% in the year-to-date time frame. It has a Zacks ETF Rank of 3. First Trust Mid Cap Value AlphaDEX Fund (NYSEARCA: FNK ) This product offers exposure to the mid-cap value sector of the U.S. equity market and employs the AlphaDEX stock selection methodology to select stocks from the S&P MidCap 400 Value Index. Holding 180 stocks in its basket, the fund provides a nice balance across each sector and securities, preventing heavy concentration. Financials make up for the top sector at roughly 17.2% share while none of the securities hold more than 1.32% share in the basket. The ETF is unpopular and illiquid in the mid-cap space with AUM of $81.8 million and average daily volume of 18,000 shares. It charges 73 bps in annual fees and expenses and has a P/E ratio of 14.51. FNK has gained 3.3% so far in the year and has a Zacks ETF Rank of 3. PowerShares Dynamic Large Cap Value Portfolio (NYSEARCA: PWV ) This fund tracks the Dynamic Large Cap Value Intellidex Index, which seeks to provide capital appreciation while maintaining value exposure. The index applies a 10-factor style isolation process and then evaluates stocks on price momentum, earnings momentum, quality and management action. This approach results in a basket of 50 securities with none holding more than 3.50% of total assets. About one-fourth of the portfolio is allotted to financials, followed by 15.9% to information technology, 10.9% to energy, and 10.2% to industrials. The fund has amassed $1.1 billion in its asset base while sees solid volume of 142,000 shares a day on average. It charges 57 bps in annual fees and has P/E ratio of 13.48. PWV is up 0.64% in the year-to-date time frame and has a Zacks ETF Rank of 3. Bottom Line Investors should note that growth stocks are currently leading the way higher in the current market. While this is true, value stocks generally outperform during periods of muted market performance, which are likely in the coming weeks especially with the collapse of the Greece deal and uncertainty surrounding the rate hike. As such, investors shouldn’t forget the value space and should take a closer look at a few of the attractive value ETFs in this segment for excellent exposure and some outperformance in the months ahead. Original Post