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A Walk in the Woods with Small Cap Value

12/17/2018 5:00 am EST

Focus: ETFS

Jim Woods

Editor, Successful Investing, Intelligence Report

The Invesco S&P SmallCap 600 Pure Value ETF (RZV) tracks a fundamentally weighted index of U.S.-listed small-cap value companies. The ETF 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, asserts Jim Woods, editor of The Deep Woods.

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.

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

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