The Sector-Neutral Value ETF
This is a compelling large-value offering, but there are some drawbacks to its sector-neutral approach.
Most value funds tend to overweight certain sectors such as financial services and energy, and underweight others, like technology. Investors who prefer to avoid large sector bets against the market might consider iShares MSCI USA Value Factor (VLUE). It tracks an index that targets the cheapest stocks in each sector (representing around 30% of the market) and sets its sector weightings equal to the broad market-cap-weighted MSCI USA Index's. Stocks are weighted according to both their market-capitalization and the strength of their value characteristics, rescaled to maintain sector neutrality. This approach allows the fund to maintain a deeper value tilt than many of its market-cap-weighted value index peers, despite having greater exposure to traditional growth industries. It charges a competitive 0.15% expense ratio and is one of the more compelling options for exposure to large-value stocks.
In contrast to traditional value indexes, this fund's benchmark assesses each stock's value characteristics relative to its sector peers. This puts stocks from different sectors on a level playing field. For example, a stock in the technology sector that looks cheap relative to its sector peers could make the cut, while an energy stock with even lower absolute valuations might not (if it is more expensive relative to its peers). Valuations may be more comparable within the same industry than across industries, which may give the fund cleaner exposure to stocks that are truly cheap relative to their peers.
Alex Bryan has a position in the following securities mentioned above: VLUE. Find out about Morningstar’s editorial policies.