After a decade of underwhelming returns, value stocks – equities that trade at a lower price relative to their fundamentals – have made somewhat of a resurgence in late 2019. Over the past three months, this cohort of stocks has outperformed its growth counterpart by about 3%.
Some market commentators attribute the comeback in value indexes versus growth indexes to sector performance. R.W. Baird analysts Willie Delwiche told MarketWatch last month that a rebound in beaten-down cyclical sectors, such as financials and materials, has contributed to value stocks’ recent comeback as investors rotate into undervalued names on hopes that global economic growth has steadied and that the United States and China will sign off on a meaningful trade agreement.
Other investment managers, like AQR Capital Management founder Cliff Asness, argue that value stocks have become attractive because they have fallen due to price moves rather than fundamentals over the past two years, which makes them cheaper, per Barron’s.
Those who want to position for value stocks to resume their recent outperformance should add these three value exchange-traded funds (ETFs) to their watchlist. Below, we take a closer look at the specifics of each fund and analyze the charts to identify possible trading opportunities.
Invesco S&P 500 Pure Value ETF (RPV)
With assets under management (AUM) of $890.89 million, the Invesco S&P 500 Pure Value ETF (RPV) seeks to provide similar returns to the S&P 500 Pure Value Index. The 13-year-old fund uses three ratios to select large-capitalization value stocks: price-to-book (P/B ratio), price-to-earnings (P/E ratio), and price-to-sales (P/S ratio). Not surprisingly, financial and consumer cyclical names feature strongly, with the sectors receiving respective asset percentage allocations of 33.48% and 16.91%. The ETF, which charges a 0.35% management fee, holds blue-chip bellwether companies such as Ford Motor Company (F), Valero Energy Corporation (VLO), and MetLife, Inc. (MET). Nearly 200,000 shares change hands daily on an average 0.03% spread to keep trading costs low. As of Dec. 2, 2019, RPV issues a 2.44% dividend yield and has gained almost 15% over the past three months. Year to date (YTD), the fund has returned 22.40%.
RPV shares spent the middle part of this year oscillating within a well-defined seven-point trading range. Price started to gain momentum in October before finally breaking above the range’s top trendline on heavy volume in early November. More recently, the fund has consolidated in a tight flag pattern, indicating upside continuation. Traders can set a profit objective by measuring the distance of the leg higher that proceeded the flag and add that amount to the pattern’s breakout point. ($7.29 + $68.50 = $75.79 profit target). Protect capital with a stop-loss order positioned just below $66.
iShares Edge MSCI USA Value Factor ETF (VLUE)
The iShares Edge MSCI USA Value Factor ETF (VLUE) aims to provide investment results that generally correspond to the MSCI USA Enhanced Value Index. The benchmark selects undervalued large- and mid-cap stocks based on fundamental metrics, including earnings, revenue, book value, and cash earnings. Technology commands the top sector allocation at 23.10%, while prominent single stock weightings include AT&T Inc. (T) at 9.08%, Intel Corporation (INTC) at 8.42%, and International Business Machines Corporation (IBM) at 3.46%. The $3.88 billion fund suits all trading strategies with its narrow two-cent spread and active daily dollar volume liquidity of over $30 million. As of Dec. 2, 2019, VLUE charges a low annual management fee of 0.15% and has returned 16.14% over the past three months. Investors also receive a 2.70% dividend yield.
The ETF’s share price broke above a six-month ascending channel in early November and has traded within a tight $2 range since. As the fund trades near its all-time high, consider using a trailing stop to let profits run as far as possible. To do this, place an initial stop order below last month’s consolidation at $86.02 and lift it under each higher swing low that forms. Conservative traders may decide to wait for a breakout above current resistance at $88 before taking an entry.
iShares MSCI EAFE Value ETF (EFV)
The iShares MSCI EAFE Value ETF (EFV) offers a cost-effective instrument for traders who want exposure to international value equities by tracking the MSCI EAFE Value Index. Japan and the United Kingdom dominate country percentage allocations at 25.40% and 22.38%, respectively. However, the ETF also provides ample coverage of value stocks listed in France, Germany, and Australia. Some of the better-known companies in the fund’s portfolio of nearly 500 holdings include Japanese car maker Toyota Motor Corporation (TM), global investment bank HSBC Holdings plc (HSBC), and British multinational oil and gas giant BP p.l.c. (BP). A trading volume of 500,000 shares per day, coupled with a narrow penny spread and competitive 0.38% expense ratio, makes the fund a swing trader’s favorite in the segment. EFV controls net assets of $5.41 billion, yields a healthy 4.11%, and has jumped 11.50% over the past three months as of Dec. 2, 2019.
A breakout above an established trendline in mid-October fueled a rally to a new 52-week high at $50.17. Over the past month, however, the price has paused and consolidated within a flag pattern, which appears to be finding support near the April swing high at the $49 level. Those who buy here should anticipate a move to $52.70, where the fund encounters crucial overhead resistance from a long-term horizontal line. Implement risk management by placing a stop order under the 50-day simple moving average (SMA).