- Avoid Value ETFs and Mutual Funds
Investors, especially value investors, should avoid most value ETFs and mutual funds because they are over weighted in high risk investments. As a value investor I am always looking for stocks that sell at low prices compared to their potential cash flow and risks associated with the underlying company. What was value and low risk in the past is not necessarily value and low risk today.
Most Value ETFs and Mutual Funds Are Loaded With Financial Services Stocks
Financial services, and particularly Bank Stocks, used to be the investment choice for “widows and orphans”. In other words they have been, in the past, considered safe dividend paying stocks with low volatility. The world has changed and these stocks are now investments with huge risks and considerable volatility.
So now value funds that used to have steady low volatility dividend paying stocks now own risky high volatility stocks with erratic dividend payouts. The question is: Are you getting what you intended when you buy these funds?
The percentage concentration of financial stocks in value funds is not insignificant. Many of these funds have considerable exposure to financial stocks.
Examples of Percentages of ETF Portfolios in Financial Services
iShares S&P500 Value Index Fund (IVE) 22.6%
iShares S&P500 Growth Index Fund (IVW) 3.8%
iShares Russell 2000 Value Index Fund (IWN) 23.0%
iShares Russell 2000 Growth Index Fund (IWO ) 2.9%
As an investor interested in Value Investing Strategies; it is important to not get caught up in labels, but understand what you are buying. Sometimes investments are not what you think they are; so do your homework. An ETF or mutual fund investment labeled “growth” may have more value or less risk than an investment labeled “value”.
Many value investing funds have heavy exposure to financial service stocks which used to be stable dividend companies but are now volatile stocks with erratic dividends. Value investors should consider investing in individual undervalued stocks; but avoid value ETFs and Mutual Funds, until the environment for financial service stocks has changed.
Related Reading: Investment Portfolio Management
(Disclosure: The Arbor Asset Allocation Model Portfolio (AAAMP) is 2.5% long iShares Russell 2000 Growth (IWO) on 2/7/2012)
| AAAMP Blog by Ken Faulkenberry | |
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Ken Faulkenberry earned an MBA from the University of Southern California (USC) Marshall School of Business with an emphasis in investments. Ken has 25 years of investment experience and is dedicated to helping people with self-directed investment management through the Arbor Investment Planner. His asset allocation strategies have an outstanding performance record. |
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This is a very important insight Ken and I am glad you brought it up. As a value investor, today I see a large number of tech stocks that have attractive valuations. These were the growth darlings of yesteryear.
It is also important to note that a value stock does not imply it can’t be a growth stock at the same time.
Thank you Shailesh. Value and Growth are the ultimate goal or our research! Some of the very tech stocks we avoided over a decade ago are now value growth stocks. In 2000 everyone wanted to own them; today they are shunned by most investors.
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