Among single-factor exchange-traded funds, the offerings focused on value were among those able to outperform broader, capitalization-weighted benchmarks in 2016. Investors rewarded value's resurgence by sending billions of dollars of fresh capital into value ETFs, and for some value ETFs, that theme is continuing to start 2017.
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For example, the increasingly popular iShares Edge MSCI USA Value Factor ETF (VLUE) added $1 billion in new assets in the fourth quarter. VLUE follows the MSCI USA Enhanced Value Index, which holds 150 large- and mid-cap stocks with the value designation. BlackRock, parent company of iShares, is bullish on the value factor.
Value looks particularly attractive in the months ahead, given projections for economic reflation and favorable valuations, among other likely tailwinds, according to recent BlackRock research.
VLUE departs from standard value ETFs at the sector level. Whereas most value ETFs feature energy and financial services stocks, in either order, as their top two sector weights, VLUE's largest sector allocation is 21.2 percent to technology. That speaks to technology's increasing credibility as a legitimate value sector.
VLUE's weight to energy stocks is just 7.2 percent, lower compared to other dedicated value ETFs.
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VLUE's Performance Record
VLUE turns four in April. Over the past three years, the ETF has trailed the S&P 500 by about 300 basis points. However, as has been widely noted, the value factor is making a notable comeback. For example, VLUE has topped the S&P 500 by over 800 basis points over the past year. Additionally, VLUE has outpaced the Vanguard Value ETF (VTV) by 410 basis points over that stretch. VLUE has been slightly more volatile than its Vanguard rival over that period.
VLUE's underlying index is designed to represent the performance of securities that exhibit higher value characteristics relative to their peers within the corresponding GICS sector. The value investment style characteristics for index construction are defined using three variables: Price-to-Book Value, Price-to-Forward Earnings and Enterprise Value-to-Cash flow from Operations, according to MSCI.
BlackRock On Value
BlackRock upgraded the value factor to Overweight from Neutral for the first quarter, noting valuations remain attractive despite several strong months of performance.
Investors have added $312.5 million since the start of the year.
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