DVY iShares Select Dividend ETF

The year 2014 so far has been broadly mixed for the U.S. equity markets. While an improving domestic job market and increased merger & acquisition (M&A) activities are driving the stock markets higher, geopolitical tensions in Russia and slowdown in the Chinese market are weighing on the stocks.   

Further, investors are fleeing from the high-flying growth stocks, which gave incredible performances last year, on lofty valuations to larger, more-mature companies that pay dividends and act as a hedge against economic uncertainty. This is especially true as the Internet, social media and biotechnology stocks have seen a sharp sell-off over the past several weeks and pushes the market lower (read: Short the Nasdaq with These Inverse ETFs).

In such a backdrop, value investing appears safe and appealing for 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.

This is because value stocks often overreact to both positive and negative news, resulting in movement in the share prices that do 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 a potential to deliver higher returns and exhibit lower volatility compared to the 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 (read: 3 Excellent Value ETFs Poised to Outperform).

Given this, investors may want to consider a nice value play in the current market. While looking at individual companies is certainly an option, a focus on top ranked value ETFs could be a less risky way to tap into the same broad trends.

Top Ranked Value ETF in Focus

We have found a number of ETFs that have the top Zacks ETF Rank of 2 or ‘Buy’ rating in the value space and are thus expected to outperform in the months to come (read: Top Ranked ETFs).

While all the top ranked ETFs are likely to outperform, the following three funds could be better choices to tap into the space. This trio has potentially superior weighting methodologies that could allow it to continue leading the value space in the months ahead.

Guggenheim S&P 500 Pure Value ETF (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 118 securities as none of these make up for more than 2.5% of total assets.

From a sector look, the ETF is heavily concentrated on financials at 25% while utilities and energy round off to the top three spots with 16% share each. The product has accumulated around $942.5 million in AUM and trades in volume of more than 206,000 shares per day on average. Expense ratio came in at 0.35%.

The fund added about 5% in the year-to-date time frame.

iShares Select Dividend ETF (DVY)

This fund provides exposure to the high dividend paying U.S. equities with a 5-year history of dividend growth. It follows the Dow Jones U.S. Select Dividend Index and holds 101 securities in its basket. The ETF is widely diversified across components as no single security holds more than 3.6% of total assets (read: Dividend ETFs Hitting New Highs).

However, one-third of the portfolio is dominated by utilities while consumer goods and industrials also receive double-digit exposure. DVY is a large cap centric fund and accounts for 63% share in this market cap level. In terms of style, the product is tilted toward value stocks at 70% of assets.

The fund is one of the largest and popular ETF in the large cap space with AUM of $13.5 billion and average daily volume of more than 730,000 shares a day. It charges 39 bps in fees per year from investors and has added 4.2% so far this year.

iShares Russell Mid-Cap Value ETF (IWS)

This product offers exposure to the mid cap value sector of the U.S. equity market and is the largest and most popular ETF in this space. It tracks the Russell MidCap Value Index and charges 28 bps in expense ratio (see: all the Mid Cap ETFs here).

Holding 539 stocks in its basket, the fund provides a nice balance across each security and prevents heavy concentration. Each security makes up for less than 1% share in the basket. In terms of sectors, financial services take the top spot at roughly one-third of the total, followed by double-digit allocation to utilities and producer durables.

The product has been able to manage over $6 billion in its asset base while trades in good volume of over 428,000 shares a day. The ETF has returned nearly 5.5% so far this year.

Bottom Line

Investors should note that these products are crushing the broad U.S. core market fund (SPY) and the growth fund (QQQ) by wide margins. This trend will likely continue as investors are taking flight to safety given stretched valuations and uneven global economic recovery (read: 3 Non-Leveraged ETFs Beating SPY).

Given this, investors shouldn’t forget the value space and should take a closer look at a few of the top ranked ETFs in this segment for excellent exposure and some more outperformance in the months ahead.

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ISHARS-SEL DIV (DVY): ETF Research Reports
 
ISHARS-RS M VL (IWS): ETF Research Reports
 
GUGG-SP 500 PV (RPV): ETF Research Reports
 
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