Exchange Traded Funds (ETFs)

ETF Talk: This Fund Tracks Fundamental Small-Cap Value

The Invesco S&P SmallCap 600 Pure Value ETF tracks a fundamentally weighted index of U.S.-listed small-cap value companies. RZV provides a unique take on small- and micro-cap value exposure, focusing on value stocks. However, its various size and sector bets heighten market risk.

As a result, investors interested in its high-beta play on small-cap value stocks also should factor in higher transaction costs due to a modest daily volume (the number of total shares traded in a given day for one stock) and sizeable spreads.

Even so, RZV replicates its index efficiently by only charging its shareholders a modest fee. The fund invests at least 90% of its total assets in securities that comprise the Index, which measures the performance of small-cap equities that exhibit strong value characteristics in the S&P SmallCap 600 Index.

The fund has struggled a bit so far in 2018, down 6.27% through Nov. 30, after rising just 1.24% in 2017. RZV’s performance has lagged since it soared 33.95% in 2016. The variation in its performance shows the fund’s volatility, and the need for investors to be comfortable with such wide swings.

Chart Courtesy of StockCharts.com

RZV’s value is measured by the following risk factors: book value-to-price ratio, earnings-to-price ratio and sales-to-price ratio. The fund and the Index are rebalanced annually.

The top RZV sectors include consumer cyclical, industrials, technology, financial services and energy. Among the fund’s top 10 holdings, 15.45% are in Office Depot (NASDAQ: ODP), Renewable Energy Group, Inc. (NASDAQ: REGI), GameStop Corp. Class A (NYSE: GME), Shoe Carnival, Inc. (NASDAQ: SCVL), Barnes & Noble, Inc. (NYSE: BKS), ScanSource, Inc. (NASDAQ: SCSC), Green Plains Inc. (NASDAQ: GPRE), OFG Bancorp (NYSE: OFG), Seneca Foods Corporation Class A (NASDAQ: SENEA) and Veritiv Corp. (NYSE: VRTV).

RZV currently has $163.35 million in net assets and an average 0.43% spread, which is the difference between the bid and asking prices of a security. The fund also has an expense ratio of 0.35%, so it is relatively cheap to hold in comparison to other exchange-traded funds.

In short, this ETF offers a distinct model for investors looking to add small-cap stocks to their portfolio. It focuses on securities that display strong value characteristics and uses an efficient index. However, due to the relative volatility of small-cap stocks, investors should, as always, perform their own due diligence to decide whether or not this fund is suitable for their portfolios.

Jim Woods

Jim Woods is a 20-plus-year veteran of the markets with varied experience as a broker, hedge fund trader, financial writer, author and newsletter editor. Jim is the editor of Intelligence Report, Investing Edge, the Bullseye Stock Trader, and The Deep Woods (formerly the Weekly ETF Report). His books include co-authoring, “Billion Dollar Green: Profit from the Eco Revolution,” and “The Wealth Shield: How to Invest and Protect Your Money from Another Stock Market Crash, Financial Crisis or Global Economic Collapse.” He’s also ghostwritten many books and articles, as well as edited content for some of the investment industry’s biggest luminaries. His articles have appeared on many leading financial websites, including StockInvestor.com, InvestorPlace.com, Main Street Investor, MarketWatch, Street Authority, Human Events and many others. Jim formerly worked with Investor’s Business Daily founder William J. O’Neil, helping to author training courses in the CANSLIM stock-picking methodology. The independent firm TipRanks rates Jim the No. 3 financial blogger in the world (out of more than 6,000). TipRanks calculates that, since 2012, he's made 361 successful recommendations out of 499 total, earning a success rate of 72% and a +15.3% average return per recommendation. He is known in professional and personal circles as “The Renaissance Man,” because his expertise includes such varied fields as composing and performing music; Western horsemanship, combat marksmanship, martial arts, auto racing and bodybuilding. Jim holds a BA in philosophy from the University of California, Los Angeles, and is a former U.S. Army paratrooper. A self-described “radical for capitalism,” he celebrates the virtue of making money from his Southern California horse ranch.