Don't Pen Value Investing's Obit Just Yet

The purported death of value investing is widely lamented, but the reality is something different. Value investing is alive, but value stocks have long lagged growth counterparts. Still, there’s a compelling case for buying discounted equities, particularly when the right strategy is deployed. The Invesco S&P 500 Pure Value ETF (RPV) accomplishes that objective. RPV tracks the S&P 500® Pure Value Index. That factoid carries weight, because that gauge differs from the traditional S&P 500 Value Index. Confirming that, over the three years ending August 5, RPV beat one of the largest ETFs tracking the S&P 500 Value Index by 1,140 basis points. So, while RPV is unlikely to deliver growth ETF-like performances, it may be ideal for investors looking for more potential upside than that found by standard value ETFs. The $1.71 billion RPV, which holds 121 stocks, turned 20 years old in March. It’s seen its share of market cycles, including those in which growth equities dominated.

Many investors assume that value investing is simply about buying strong companies at favorable prices and to an extent, that’s accurate. “Value investing is built around a basic idea: Investors should buy stocks at a price below the value of their underlying businesses,” said Morningstar’s Daniel Sotiroff . “The gap between a stock’s price and the business’s true value is the edge. In theory, the market should eventually recognize the discount and increase the stock’s price to the investor’s advantage. Effectively, value investors are hunting for mispriced stocks that are trading at bargain prices.”

RPV builds on the value proposition by focusing on value traits such as book-value-to-price ratio, earnings-to-price ratio, and sales-to-price ratio. Meanwhile, it layers in growth elements. Those include three-year sales per share growth, the three-year ratio of earnings per share change to price per share, and momentum, according to Invesco . For value investors, the RPV methodology could prove compelling because value investing is often a combination of art and science. That point isn’t reflected by all of the ETFs in this category. “Assessing a business’s value is not a precise exercise. There is a degree of judgment involved, and some value investors likely consider a range of possible outcomes,” added Sotiroff. “But any investor engaged in this type of work has to be reasonably accurate often enough to make the effort worthwhile, and there’s a lot that can go wrong.” None of RPV’s holdings exceed a weight of 2.58%. Financial services, healthcare and consumer staples names combine for more than half of the fund’s roster.