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ETFs As a Proxy For Value Stocks
2006-07-24 20:56 | Posted by The Graham Investor | Permanent Link | Exchange Traded FundsExchange Traded Funds are a great tool, and every investor should use them. The number of ETFs available to investors has grown almost exponentially in the last few years. An ETF is traded like a stock, but can contain a basket of stocks, even the stocks in an entire sector or index. Much has been written about ETFs elsewhere, but the gist is that:
"Everyone can see what goes into an ETF, investor fees are clearly laid out, investors can be confident that they can exit at any time, and even the authorized participant's fees are guaranteed to be modest. If one allows ETF prices to deviate from the underlying net asset value of the component stocks, another can step in and take profit on the difference, so their competition tends to keep ETF prices very close to it underlying Net Asset Value (value of component stocks)."
In researching ETFs and trying to determine how they may help you as a Value Investor, for example: if you have limited funds but want to be exposed to a portfolio of value stocks; if you don't have the stomach or patience to seek out opportunities yourself; or even if you simply want to "ETF" a portion of your value portfolio -- you can check out some of the "value ETFs".
Yahoo! has a simple but useful ETF screener. We played around with it and came up with the following link: http://finance.yahoo.com/etf/browser/hl?k=10&c=etf_sv&f=0&cs=1&ce=7
Of particular interest to us at this point in time was RZV, Rydex ETF Trust ($36.60 as of close today, 07/24/2006). The average Market Cap of stocks in this ETF seems to be somewhat closer to the definition of Small Caps ($250M to $1 B). What caught our eye is the Portfolio Price/Cash Flow which is a shade under 5. We like this because a P/CFO under 5 is one of the criteria for one of our best-performing stock screens. The Earnings Growth of RZV is second-highest of this group of Small Value ETFs.
The only issue is there is not much history to this ETF -- the chart only goes back to March this year. We could assume that it will likely mirror the other ETFs (the charts for the others which are longer-established are broadly similar over the long-term), and likely outperform them although it may be more volatile due to the lower market-caps.
The market is currently in the summer doldrums and may continue to vacillate till November, if history is any guide. Perhaps now may be a good time to begin accumulating some RZV to add more value diversification?