Value investors aim to capture returns by investing in cheap assets, like stocks, and rotating out of expensive ones. As we get ready to wrap up 2020, many market participants wonder if value investing, which we previously discussed in detail, could be back in fashion.
Benjamin Graham and David Dodd are usually regarded as the most important early advocates of value strategies, where long-term investors buy stocks at a price below the intrinsic value. They believe that the market will eventually realize the company’s real value, and the share price will rise to reflect that.
As well, in the current pandemic environment—seen throughout most of 2020—tech stocks have taken center stage because of their benefits for work-from-home populations. Concurrently, a of variety shares from other sectors have suffered as their business models don’t foster sheltering in place, creating an array of potentially undervalued buying opportunities.
Warren Buffett has long been recognized as the most important value investor of all time. The success of his holding company, Berkshire Hathaway (NYSE:BRKa), (NYSE:BRKb), which Buffett has led for more than five decades, is regarded as a testament to the strength of his value investing principles.
Nick Kirrage, a fund manager with Schroders, said:
“In the past few years, compared with market indices increasingly dominated by bond proxies or tech stocks, value-style portfolios have underperformed… 2020 has been an extremely difficult year for value investors.”
But November brought positive vaccine news, mainly from Pfizer (NYSE:PFE) and partner BioNTech (NASDAQ:BNTX), as well as Moderna (NASDAQ:MRNA). Since then, many analysts and articles have voiced views that value investing could finally be back, pointing to the recent, sporadic rotation out of tech shares, into value stocks.
Indeed, in an article titled “Value investing is struggling to remain relevant,” the Economist said:
“…prospects for a coronavirus vaccine raise hopes of a quick return to a normal economy. This might be the start of a long-heralded rotation from overpriced tech to far cheaper cyclicals—stocks that do well in a strong economy. Perhaps value is back.”
Therefore, today, we will introduce two new exchange-traded funds (ETFs) that could appeal to a range of investors who want to include U.S.-based as well as global value stocks in long-term portfolios.
1. Invesco S&P 500® Pure Value ETF
Current Price: $$60.33
52-Week Range: $33.62-$70.00
Dividend Yield: 2.36%
Expense Ratio: 0.35%
The Invesco S&P 500 Pure Value ETF (NYSE:RPV) provides exposure to a range of stocks from the S&P 500 Index that exhibit strong value characteristics, based on three metrics—book-value-to-price ratio, earnings-to-price ratio and sales-to-price ratio.
RPV, which has 102 holdings, tracks the S&P 500 Pure Value Index. It started trading in 2006 and has close to $1.1 billion under management.
In terms of sectors represented, financials have the highest weighting (33.93%), followed by consumer discretionaries (15.43%), energy (11.49%), materials (10.50%), health care (9.85%) and consumer staples (7.30%). The top 10 businesses comprise around 20% of the fund, which means no company is large enough to affect the fund significantly by itself.
Berkshire Hathaway, auto makers General Motors (NYSE:GM) and Ford (NYSE:F), oilfield services group Baker Hughes (NYSE:BKR), retailer Gap (NYSE:GPS), agricultural commodity giant Archer-Daniels-Midland (NYSE:ADM), paper and packaging business WestRock (NYSE:WRK) and Mosaic (NYSE:MOS), which produces potash and phosphate, are among the leading names in the fund.
Year-to-date, RPV is down around 11%. However, since late October, the fund has returned over 20%. The current forward P/E and P/B ratios stand at 12.4 and 0.96, respectively. We believe the fund could deserve a place in a long-term diversified portfolio.
2. iShares Edge MSCI International Value Factor ETF
Current Price: $$22.53
52-Week Range: $15.28-$24.79
Dividend Yield: 3.79%
Expense Ratio: 0.30%
The iShares Edge MSCI Intl Value Factor ETF (NYSE:IVLU) gives access to international large- and mid-capitalization (cap) stocks that exhibit fundamental value characteristics.
IVLU, which has 353 holdings, tracks the MSCI World ex USA Enhanced Value Index. The fund started trading in 2015. Financials have the highest weighting with 18.02%, followed by industrials (14.77%), health care (11.79%), consumer discretionaries (11.29%) and consumer staples (10.48%).
UK-headquartered British American Tobacco (NYSE:BTI), European pharma and life sciences groups Novartis (NYSE:NVS), Sanofi (NASDAQ:SNY) and Bayer (OTC:BAYRY), Japanese car maker Toyota Motor (NYSE:TM), France-headquartered financial services group BNP Paribas (OTC:BNPQY) and mining and metals giant Rio Tinto (NYSE:RIO) are among the top 10 names in the fund, which make up about 20% of net assets of almost $551 million.
YTD, the fund has lost about 6%. However, like RPV, its returns over the past six weeks has been well over 20%. The fund’s P/E and P/B ratios are 11.35 and 0.87, respectively. Those investors looking to diversify internationally may want to keep the fund on the radar.