ETF Talk: This Fund Tracks Fundamental Small-Cap Value

Jim Woods

Jim Woods has over 20 years of experience in the markets from working as a stockbroker, financial journalist, and money manager.

The Invesco S&P SmallCap 600 Pure Value ETF tracks a fundamentally weighted index of U.S.-listed small-cap value companies. RZV 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.

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.

Chart Courtesy of StockCharts.com

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

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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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