It is safe to say that October brought little in the way of good news for equity investors. The S&P 500 slid 7.2% for the month as several sectors experienced some of their worst monthly declines on record.
Consumer discretionary and technology stocks were among the worst offenders last month, resulting in substantial declines for exchange-traded funds (ETFs) dedicated to the growth and momentum factors. As just one example, the iShares Edge MSCI USA Momentum Factor ETF (CBOE:MTUM) slid 10.3% in October.
Sure, it is a stretch to say there was good news for broad-based equity funds last month, but there were some positive signs for value funds. Some of the best ETFs in October were value funds, indicating value stocks could finally be on the mend, particularly if growth and momentum fare continue struggling. In October, some of the best ETFs were simply less bad. That is the case with the iShares S&P 500 Value ETF (NYSEARCA:IVE), which was down 5.7% last month.
Another perk of value ETFs, particularly in the current environment, is that these funds can help investors limit portfolio volatility. Here are some of the best ETFs with value tilts to consider over the next several months.
Best ETFs: iShares Edge MSCI USA Value Factor ETF (VLUE)
Expense ratio: 0.15% per year, or $15 on a $10,000 investment.
One of the best ETFs for evolved value investing is the iShares Edge MSCI USA Value Factor ETF (CBOE:VLUE). The $3.52 billion VLUE tracks the MSCI USA Enhanced Value Index and holds 149 stocks with favorable value traits.
VLUE separates itself from competing value strategies because its sector weights are departures from prosaic value funds. Even some of the best ETFs that use old school valuation metrics are heavily concentrated in one or two sectors, usually energy and financial services. Rarely does technology appear in force in value strategies, but VLUE allocates 26.54% of its weight to that sector, including a more than 12% weight to shares of Apple Inc. (NASDAQ:AAPL).
VLUE is one of the best ETFs for conservative investors looking for value stocks because its three-year standard deviation of 10.64% is not alarming relative to broad equity benchmarks and an annual fee of just 0.15% is favorable among smart beta strategies.
Best ETFs: Distillate U.S. Fundamental Stability & Value ETF (DSTL)
Expense ratio: 0.39% per year
One of the best ETFs on the value front may just be one of the newest. The Distillate U.S. Fundamental Stability & Value ETF (NYSEARCA:DSTL) debuted in late October and mixes the quality and value factors. What makes DSTL one of the best ETFs for value investors is that it offers a fresh, relevant approach to the value factor.
Distillate Capital, DSTL’s issuer, argues that traditional valuation metrics emphasize physical assets, such as plants and factories, while assessing often high multiples to intellectual property. Traditional accounting metrics treat issues such as intellectual property and research and development as expenses whereas physical assets are just that: assets.
“What we’ve observed as fundamental analysts going back to the 1980s is that many traditional valuation metrics have become increasingly ineffective as tools for comparison as the economy has evolved from physical assets to intellectual ones,” said Distillate Capital CEO Tom Cole.
Technology and healthcare stocks combine for 51.50% of DSTL’s weight, according to issuer data. Apple is also this ETF’s top holding.
Best ETFs: iShares Edge MSCI Intl Value Factor ETF (IVLU)
Expense ratio: 0.30% per year
For value investors, some of the best ETFs focus on markets outside the U.S. As has been widely documented, ex-U.S. equities are struggling this year, but many of those markets sport valuations below those of major domestic equity benchmarks.
The iShares Edge MSCI Intl Value Factor ETF (NYSEARCA:IVLU) has not been immune to the ex-U.S. slide this year, but this one of the best ETFs to consider for when international stocks bounce back. Year-to-date, IVLU is down just under 9%, but that is noticeably less bad than the double-digit loss incurred by the MSCI EAFE Index, indicating IVLU’s value tilt could position the fund for leadership status when international stocks are back in style.
IVLU tracks the MSCI World ex USA Enhanced Value Index and holds nearly 300 stocks. The fund’s three-year standard deviation is below that of several widely followed international equity indexes. Geographic diversity is a potential challenge with IVLU as just three countries – Japan, the U.K. and France – combine for two-thirds of the fund’s weight.
Best ETFs: Cambria Global Value ETF (GVAL)
Expense ratio: 0.69% per year
The Cambria Global Value ETF (NYSEARCA: GVAL) is another one of the best ETFs for investors searching for the combination of global exposure and a unique approach to valuation metrics. Rather than focus on traditional price-to-earnings, GVAL emphasizes the metric known as the cyclically adjusted price-earnings ratio, or CAPE.
Another point speaks to GVAL’s best ETFs status: simplicity of investment objective. GVAL is rooted in the notion that when a security’s starting valuations are low, its expected future returns can be higher.
GVAL’s selection universe includes 45 developed and emerging markets with the top 25% with the lowest CAPEs making the cut. As of the end of the third quarter, Israel and Portugal combined for over a quarter of GVAL’s weight.
Best ETFs: Invesco S&P MidCap 400 Pure Value ETF (RFV)
Expense ratio: 0.35% per year
Mid-cap stocks can be part of the value proposition and that combination has proven rewarding over long holding periods. In fact, some of the best ETFs in the mid-cap arena are value funds. That group includes the Invesco S&P MidCap 400 Pure Value ETF (NYSEARCA:RFV). RFV, which debuted in 2006, follows the S&P MidCap 400 Pure Value Index.
That benchmark “measures the performance of securities that exhibit strong value characteristics in the S&P MidCap 400 Index. Value is measured by the following risk factors: book value-to-price ratio, earnings-price ratio and sales-price ratio,” according to Invesco.
RFV holds 86 stocks, over half of which hail from the financial services, energy and consumer discretionary sectors. RFV lost 7% in October, but if history repeats, investors will find this is one of the best ETFs to own in the mid-cap segment over multi-year holdings periods.
As of this writing, Todd Shriber does not own any of the aforementioned securities.