Tag Archives: ees

Small-Cap Value ETFs: Key To Win In Post Lift-Off Era?

The U.S. economy will probably experience a shift in era by this year end, if economic conditions remain unchanged. With the Fed now overtly referring to December as the timeline for raising interest rates after a decade and putting global growth issues aside unlike its prior meetings, investors may now have to rush to alter their portfolio and make it in line with the looming Fed rate hike. Though much of the impending shock has been priced in at the current level, gyrations are still expected in the stock market post lift-off. Though the Fed affirmed that the rate hike trail would be slower, investors know that this will be the beginning of the end of the rock-bottom rates era. Naturally, they will be hunting for the right equity investing strategy. Notably, years of cheap money fueled the U.S. growth stocks as evident from the 106% jump by iShares Russell 2000 Growth ETF (NYSEARCA: IWO ) in the last 10 years and its 75% surge in the last five years (as of November 18, 2015). But, value stocks underperformed, as indicated by iShares Russell 2000 Value ETF ‘s (NYSEARCA: IWN ) 45.3% gain in the last 10 years and about 44% rise in the last five years. Growth investing means buying those companies, which exhibit fast-growing earnings, indulge heavily in capital spending and are forecast to earn at an above-industry rate. This group of companies normally pays lesser dividend or no dividend and capital appreciation is the main motive. Quite understandably, this high-growth proposition requires more capital and lower interest rates to be executed. On the other hand, value strategy includes stocks with strong fundamentals – earnings, dividends, book value and cash flow – compared with their current market prices. These stocks trade below their intrinsic value and are undervalued by the market. This pool of companies normally pays sounder dividends too. Thus, it is historically seen that value stocks perform better than growth stocks in a rising rate environment, mainly due to the difference in their modes of operation. Then, as per analysts , the right time to tap value is when the market reaches its zenith and retreats on overvaluation. For fear of a horrendous sell-off, investors seek safety, which value stocks normally offer unlike growth stocks. Since the market is likely to be wobbly, value stocks can predominate. Moreover, in the absence of cheap money inflows, investors are likely to look for cheaper stocks with great potential rather than the pricey and glamorous growth stocks. All in all, there is a high chance that value stocks will rule the U.S. markets over the next few months. The global investment management firm Pimco also expects this trend to be established in the coming future. Analysts noted that: “During the periods when the Fed was raising interest rates, the value stocks had an average return of 1.2% a month, or 14.4% a year, versus the growth index’s 0.7% a month, or 8.3% a year.” Now with the U.S. economy taking root, job reports showing strength and inflation staying decent, small-cap value stocks should be the best bets ahead. Small-cap stocks are the best measure of domestic economic recovery as these are less exposed to foreign lands. Moreover, terror attacks in several parts of the globe and international growth issues can also be stripped out via U.S. small-cap valued ETFs. Below we highlight three such ETFs, which could be in focus in the coming days. S&P Small Cap 600 Value Index Fund (NYSEARCA: IJS ) The fund looks to provide exposure to U.S. small-cap value stocks by tracking the S&P SmallCap 600 Value Index. The $3.14-billion fund holds a total of 468 small-cap stocks. The fund appears diversified as no stock accounts for more than 0.92% of the basket. Among the different sectors, Financials, Industrials and IT occupy the top three positions with 24.36%, 19.75% and 16.59% of weight, respectively. The fund charges a premium of 25 basis points annually. This Zacks Rank #3 (Hold) ETF was up 1.25% in the last one month (as of November 18, 2015). WisdomTree SmallCap Earnings Fund (NYSEARCA: EES ) For a slightly different approach to the small-cap market, investors may want to consider EES, as it follows earnings-generating companies in the small-cap universe of the U.S. stock market. Furthermore, the fund looks to weight by earnings, giving bigger weights to firms that earn more, irrespective of market capitalization. This results in a portfolio of roughly 950 securities. No stock accounts for more than 1.1% of the fund. Financials (27.34%), Industrials (18.48%), Consumer Discretionary (15.68%) and IT (12.24%) are the top four sectors of the fund. This $382-million fund charges 38 bps in fees. The fund has a Zacks ETF Rank #3 (Hold) while it was almost flat in the last one month. Vanguard Small-Cap Value ETF (NYSEARCA: VBR ) This fund provides exposure to the value segment of the U.S. small-cap market by tracking the CRSP US Small Cap Value Index. It holds a large basket of 843 stocks, which is widely spread across individual securities as none of these has more than 0.6% of assets. In terms of sector exposure, Financials dominates the portfolio at 30%, followed by Industrials (20.5%) and Consumer Services (12.2%). The ETF is quite popular with AUM of more than $5.68 billion. It is one of the low-cost choices in the small-cap space, charging 9 bps in fees per year from investors. The fund added about 0.6% in the last one month. VBR has a Zacks ETF Rank #3. Original post .

3 Small Cap Value ETFs For Every Type Of Investor

I’ve surveyed the small cap ETF universe and found 3 ETFs I like. I narrowed them down for aggressive investors, conservative investors and average investors. Each ETF has a reasonable expense ratio and is broadly diversified. I am a value investor, meaning I look for stocks that the market hasn’t discovered yet or that are out of favor for some reason. My favorite area for value stocks is the small-cap arena. My best picks over the years have been those that started as small-caps and grew due to their success. It’s these overlooked stocks whose stories I like that I spend most of my time on. However, I can’t spend all my time on them, and that’s why I’ve been hunting down 3 small-cap ETFs to share with aggressive investors, conservative investors, and the average investor. Why own a small-cap ETF? Other than the fact that small-cap stocks have historically outperformed their larger brethren and offer the best chances of obtaining a multi-bagger return, you must have diversification in your portfolio. Sector outperformance occurs all the time, and the more diversification you have, the better. If you don’t have diversification, then you risk seeing your overall portfolio fall more in bad times by having your money overly concentrated. For the aggressive investor, consider the WisdomTree SmallCap Earnings ETF (NYSEARCA: EES ) . This may sound like a silly criteria, but this ETF only invests in earnings generating small-cap companies. Sure, an aggressive investor may not care if a company is generating earnings or not, but I’d argue that’s only true of GROWTH stocks. Value stocks need to be making money to be a value play. EES happens to be a fundamentally weighted index fund, taking the smallest 25% of companies in the universe of profitable small-cap companies, after removing the 500 largest companies. Since the weighting is earnings based, the companies with the largest profits get weighted the most heavily. Now, let’s be sure the ETF is defining “earnings” as what we’d expect it to. The ETF refers to “core earnings,” as defined by Standard & Poor’s, to include expenses, income and activities that reflect the actual profitability of the company. So that’s just fine by me. It’s also broadly diversified with 957 holdings and, as I’d hope for in a small-cap fund, 90% of them are under $2 billion in market cap. Sure enough, even this fund has a 26% weighting in financials, with 18% in industrials, 18% in consumer discretionary, 12% in IT, 9.5% in health care, 6% in energy and 4% in materials. I consider EES to be for the aggressive investor because it is quasi-actively managed. The assumption is that actively managed funds will be a bit more aggressively directed because investors assume management is designed to outperform. That doesn’t necessarily mean there will be greater risk, but that’s often the case. Since its inception on 2/23/07, the fund’s total returns have been 53%, and it has been outperforming its benchmark in the most recent 3-year and under periods. A basic small-cap value ETF choice for the average investor is always going to be found in the Vanguard family of funds. In this case, I look at the Vanguard Small Cap Value ETF (NYSEARCA: VBR ) . Vanguard’s approach toward value securities is to evaluate them based on price-to-book, forward earnings-to-price, historical earnings-to-price, dividend-to-price and sales-to-price ratios. It is a passively managed fund that carries 843 stocks, and the top 10 only account for 4.8% of the total asset base. I like that kind of broad diversification, and like the weighting even more. Financials account for 30.7%, industrials are 20%, consumer services at 13%, technology comes in at 7%, consumer goods is also at 7%, health care at 7%, and energy at 4%. I consider Vanguard for the average investor since it seeks to mirror the benchmark with low fees. Nothing special here. It has essentially matched the Russell 2000 Value index for a 37% return since February 2007. It has a 114% total return over the past ten years, and 104% over the past five years. For the more conservative investor, the iShares Russell 2000 Value ETF (NYSEARCA: IWN ) . This $5.61 billion market cap ETF was launched in 2000, so there’s a long enough track record for me to evaluate it as being appropriate for this class of investor. It is very well diversified with 1,314 holdings. The ETF basically takes the Russell 2000 index and pulls out companies that have value characteristics in the broadest possible sense. The average price-to-earnings ratio is 14.19, which is quite a bit lower than in recent months, making it particularly attractive. Financials account for 43% of the ETF, which is a bit more than I’d like, but the vast number of holdings offsets it to some degree. Industrials account for 12%, consumer discretionary comes in at 10.74%, information technology at 10.25%, utilities at 7%, materials at 3%, energy at 4.6% and the rest falls into health care, consumer staples and derivatives. As a conservative fund, it aims for true value plays so that downside risk is limited, but upside gains can take longer to develop. For example, it only has a 12% return since February of 2007. However, it has a 172% return over fifteen years. As with any article regarding investments, you should never rely on information you read without doing your own due diligence. My articles contain my honest, forthright and carefully considered personal opinion, and conclusions, containing information derived from my own research. This may include discussions with management. I do not repeat “talking points” but may quote management from an interview. I am never influenced by third parties in arriving at my conclusions. Do not solely rely on my articles or anyone else’s when making an investment decision. Always contact your financial advisor before investing in any security. 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.