The start of 2016 was extremely rocky for the broader stock market, especially given the persistent slowdown in China and the collapse in oil prices. Subsequently, weak corporate earnings, a strong dollar, sluggishness in other emerging markets, uncertain timing of the next interest rate hike, and a spate of negative U.S. economic data added to the long list of woes.
In particular, the global headwinds have started to hurt the U.S. economy as GDP for the fourth quarter grew at a slower pace of 0.7% after having advanced 2% in the third quarter and 3.9% in the second. With this, the rate of economic expansion in 2015 is same as that of 2.4% in 2014.
While strong job growth, an improving housing market, and bumper auto sales continued to fuel growth in the economy throughout the year, falling oil prices and a strong dollar hurt consumer and business spending. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, grew 2.2%, down from 3% recorded in the third quarter while business spending contracted 2.5% after rising 9.9% in the third quarter.
Moreover, the International Monetary Fund (IMF) recently warned that the global economy is on the verge of another financial meltdown and subsequently slashed the global growth forecast for the third time in less than a year. The agency now expects the global economy to grow 3.4% this year and 3.6% in the next, both down 0.2% from the previous estimates. Earlier this year, the World Bank also cut its growth forecast for the global economy to 2.9% for this year from its previous projection of 3.3%, citing that the slowdown in China, which is one of the big emerging market countries, and a worse-than-expected slowdown in Brazil and Russia have worsened the already bleak global economic outlook.
Amid these headwinds and uncertainties, investors should focus on large cap stocks, which tend to be the most stable in an adverse economic scenario, while at the same time offering capital appreciation in a booming market. Further, honing in on value securities in this capitalization level ensures safety to investors. Value investing includes stocks with strong fundamentals - earnings, dividends, book value and cash flow - that trade below their intrinsic value and are undervalued by the market.
Why Value Investing Is A Better Play
Value stocks often overreact to both positive and negative news, resulting in share price movement that does not reflect the company's true long-term fundamentals. This creates buying opportunities in such stocks at depressed prices and shows potential for capital appreciation when the stock finally reflects its true market price.
As a result, value stocks have the potential to deliver higher returns and exhibit lower volatility compared to growth and blend counterparts. In fact, these stocks outperform the growth ones across all asset classes when considered on a long-term investment horizon, and are less susceptible to trending markets.
Given this, investors may want to consider a nice large cap value play in the current volatile market environment. While looking at individual companies is certainly an option, a look at the top-ranked ETFs in this space could be a less risky way to tap into the same broad trends.
Top-Ranked Large Cap Value ETF in Focus
We have found a number of ETFs with a Zacks ETF Rank of 2 (Buy) in the large cap value space expected to outperform in the months to come (see all the Top-Ranked ETFs here).
While all these top-ranked ETFs are likely to outperform, the following five funds could be good choices to play the space. These products have potentially superior weighting methodologies, which could allow them to lead the large cap value space in the coming months.
Vanguard Value ETF (NYSEARCA:VTV)
This fund seeks to track the CRSP US Large Cap Value Index, which measures the performance of the largest U.S. value stocks. With AUM of $17.6 billion and an expense ratio of 0.09%, VTV is one of the cheapest funds in this space. Volume is also solid exchanging around 1.7 million shares per day, on average. The product holds 328 stocks, which are well spread across each component, as none of these holds more than 4.3% share. Here again, financials takes the top spot with one-fourth share, while healthcare, industrials, consumer goods and technology round off to the next four spots with a double-digit allocation each. The ETF has shed 4.9% in the year to date time period.
Vanguard Mega Cap Value ETF (NYSEARCA:MGV)
This ETF provides exposure to 160 stocks by tracking the CRSP US Mega Cap Value Index. It is pretty well spread out across components, as none of the firms holds more than 5% of assets. From a sector look, about one-fourth of the portfolio is dominated by financials, while healthcare, information technology, industrials and energy round off the top five with double-digit allocation each. MGV has AUM of $1 billion and average daily volume of 62,000 shares. It charges 9 bps in annual fees from investors and has lost 4.6% so far this year.
Schwab U.S. Large-Cap Value ETF (NYSEARCA:SCHV)
This fund tracks the Dow Jones U.S. Large Cap Total Stock Market Index, holding 342 stocks in its basket. None of the securities accounts for more than 4.6% of total assets. Additionally, the product is well spread out across sectors, with financials, consumer staples, information technology, and healthcare accounting for double-digit exposure each. SCHV has amassed assets worth $1.7 billion and trades with volume of around 268,000 shares a day, on average. It charges a low expense ratio of 0.07% and is down 4.1% so far this year.
PowerShares Dynamic Large Cap Value Portfolio ETF (NYSEARCA:PWV)
This fund tracks the Dynamic Large Cap Value Intellidex Index, which seeks to provide capital appreciation while maintaining value exposure. The index applies a 10-factor style isolation process and then evaluates stocks on price momentum, earnings momentum, quality and management action. This approach results in a basket of 50 securities, each holding less than 4% of total assets. About one-fourth of the portfolio is allotted to financials, followed by 15.3% to information technology, 12.5% to consumer staples and 10.5% to energy. The fund has amassed $912.4 million in its asset base, while it sees solid volume of 143,000 shares a day, on average. It charges 57 bps in fees per year and has lost 3.7% this year (see all the Large Cap Value ETFs here).
iShares Morningstar Large-Cap Value ETF (NYSEARCA:JKF)
With AUM of $280.5 million, this product tracks the Morningstar Large Value Index. Holding 84 securities, the fund is moderately concentrated on the top firms, with none holding more than 6.51% of assets. From a sector look, financials, energy, consumer staples, and industrials are the top sectors with double-digit exposure each. The ETF charges 25 bps in annual fees and trades in light volume of nearly 16,000 shares a day. It has shed 3.8% in the year to date time frame.
Value stocks generally outperform during periods of muted market performance, which we are seeing currently. Investors are taking flight to safety given global slowdown concerns and geopolitical tensions.
Therefore, the above-mentioned products have lost less that the broad U.S. market fund (NYSEARCA:SPY) and the growth fund (NASDAQ:QQQ). As such, investors shouldn't forget the value space and should take a closer look at a few of the attractive value ETFs in this segment for excellent exposure and some outperformance in the months ahead.