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For Value ETFs, the Bet Is on Financial Stocks

Latest data show that most funds have weightings of more than 20 percent in financials.

If the portfolios of value-oriented ETFs are anything to go by, the best value stocks out there at the moment are in the financial sector.

The findings come from a detailed analysis of 18 value ETFs done by financial data firm Axioma on behalf of Institutional Investor.

According to the data from June 14, 2013, while virtually all of the funds share roughly similar allocations to sectors such as energy, health care, industrials and information technology, every one of the funds has made very large bets on stocks within the financial sector.

Of the 18 funds, all but one has made the financial sector its largest exposure. Only the First Trust Large-Cap Value Alphadex Fund deviates from this trend, with a slightly larger exposure to energy stocks (16.7 percent) compared to its 15.8 percent exposure to financials. For all other ETFs analyzed, the big bet is financial.

For the large-cap-focused funds, the iShares Russell 3000 Value has the largest concentration, with 29 percent, while eight other funds maintain an allocation of greater than 20 percent. 

Among midcap focused funds, the bet is even greater, with each of the iShares Russell Midcap Value Index Fund, the Vanguard Midcap Value Fund and the SPDR S&P 400 Midcap Value ETF respectively placing 30.5 percent, 20.9 percent and 27.3 percent on financial stocks.

The two largest single bets on the financial sector exist among the small-cap-focused funds (see the table below for all allocations to the financial sector).

Value ETFs and financial stocks
FundHoldingFundHoldingFundHoldingFundHolding
iShares Russell 1000 Value28.3%iShares Russell 3000 Value29.0%iShares Morningstar Large Value Index Fund24.5% Schwab U.S. Large-Cap Value ETF23.4%
Vanguard Mega Cap 300 Value Index Fund 21.8%Vanguard Value Index Fund21.5%First Trust Large-Cap Value Alphadex Fund 15.8%Powershares Dynamic Large-Cap Value Portfolio 28.6%
SPDR S&P 500 Value ETF23.9%Vanguard Russell 1000 Value 28.4%iShares Russell Midcap Value Index Fund30.5%Vanguard Midcap Value ETF 20.9%
SPDR S&P 400 Midcap Value ETF 27.3%iShares Russell 2000 Value37.1%iShares S&P Small-Cap 600 Value Index Fund22.2%Vanguard Small-Cap Value ETF29.0%
SPDR S&P 600 Small-Cap Value ETF22.4%Vanguard Russell 2000 Value37.2%

Axioma also analyzed the various funds’ exposure to certain risk factors. Predictably, each of the ETFs has a positive correlation to value stocks. The degree to which they do so, however, varies with some funds closer to zero  — or with a neutral correlation — than others (see table below).

Value ETFs and their exposure to value stocks
FundExposure FundExposureFundExposureFundExposure
iShares Russell 1000 Value0.37iShares Russell 3000 Value0.38iShares Morningstar Large Value Index Fund0.43 Schwab U.S. Large-Cap Value ETF0.12
Vanguard Mega Cap 300 Value Index Fund 0.20Vanguard Value Index Fund0.20First Trust Large-Cap Value Alphadex Fund 0.47Powershares Dynamic Large-Cap Value Portfolio 0.25
SPDR S&P 500 Value ETF0.26Vanguard Russell 1000 Value 0.37iShares Russell Midcap Value Index Fund0.32Vanguard Midcap Value ETF 0.12
SPDR S&P 400 Midcap Value ETF 0.30iShares Russell 2000 Value0.54iShares S&P Small-Cap 600 Value Index Fund0.36Vanguard Small-Cap Value ETF0.31
SPDR S&P 600 Small-Cap Value ETF0.36Vanguard Russell 2000 Value0.54

Also revealed by the analysis of these risk factors is the fact that, perhaps unusually, some of the funds have large exposures to growth sector stocks. The Powershares Dynamic Large-Cap Value Portfolio, for example, has a 22 percent exposure to growth stocks, while Schwab’s U.S. Large-Cap Value ETF holding has a 16 percent exposure. 

Value ETFs and financial stocks
FundHoldingFundHoldingFundHoldingFundHolding
iShares Russell 1000 Value4.93%iShares Russell 3000 Value4.55%iShares Morningstar Large Value Index Fund9.54%Schwab U.S. Large-cap Value ETF5.00%
Vanguard Mega Cap 300 Value Index Fund 5.37%Vanguard Value Index Fund4.64%Vanguard Russell 1000 Value4.94%

Finally, Axioma analyzed the funds’ individual holdings and found that, while no single stock dominated the small- and medium-cap focused funds, among the large cap ETFs, Exxon Mobil Corporation was the most popular stock. The oil and gas multinational was the top holding for seven of the ten large-cap-focused funds (taking up 9.54 percent of the iShares Morningstar Large Value Index Fund portfolio), and in the top ten for two others.  

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