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Large Cap Value ETFs Reap The Rewards Of Trump Rally

Wednesday, February 15, 2017 12:57
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From Zacks: As soon as the market skyrocketed on renewed Trump bump, investors started doubting the tenure of the rally. The S&P 500 reached a record closing high for the fourth successive session on February 14.

President Donald Trump’s indications of a tax overhaul in a few weeks, a strong reporting cycle and the Fed chair Yellen’s hints of faster rate hikes in the coming months that benefited the financial sector were behind this ascent.

Donald Trump intends to beef up public spending by hundreds of billions of dollars on infrastructure. He also promised lower corporate taxes and ease in regulations. Overall, prospects of reduction in the tax burden on American corporate houses were well received by investors and stocks surged (read: Trump Loving ETFs & Stocks for Valentine’s Day).

Many investors are eyeing large-cap value ETFs in this buoyant market and several large-cap vale ETFs actually hit 52-week highs on February 14. Let’s find out why.

Why Are Investors Looking for Value?

This surge in stocks since election in early November called for overvaluation concerns. SPDR S&P 500 ETF (SPYFree Report) added over 8% in the last three months (as of February 14, 2017). Overall, after such a huge rally, a pullback can be seen anytime soon.

Though the latest hawkish comments from Yellen have been suppressed by the optimism of steep tax cuts, any kind of sooner-than-expected Fed move may prove unfriendly. That being said, we do not expect any steep selloff.

Moreover, Trump hit headlines with his controversial plans and policies lately. His protectionist policies regarding his trade, immigration and deregulation in the banking sector are occasionally spurring skepticism.

Though the OPEC has so far been true to the output cut deal to shore up oil prices, signs of rising U.S. crude production put a cap on the commodity price all over again. Energy investors now think that the benefits of the historic OPEC output cut deal signed in late 2016 is now baked in the current valuation.

The oil story ahead will be based on U.S. shale production. This is especially true given that Trump is in favor of the shale oil boom. United States Oil (USO) and United States Brent Oil (BNO) lost over 0.4% and 0.1% in the last one month (as of February 14, 2017).

Why Large Caps?

Large caps have wider foreign exposure. So, improving economic fundamentals globally give reasons to bet on large-cap stocks.

This capitalization has been out of investors’ favor due to the rising greenback. But the greenback saw heavy losses in late January when Trump spoke about the currency war. If the Fed remains slow and Trump favors a low-dollar environment, the greenback is likely to remain tame in the coming days.

Next comes earnings improvement. Large-cap stocks on the S&P 500 finally ended the long-rut of earnings recession. Earnings growth of the S&P 500 is expected to remain on track to reach its highest level in two years. For the Q4 earnings season, the S&P 500 is expected to score 7.3% earnings growth on 3.9% revenue growth. The momentum will pick up ahead with the index expected to log 8% earnings growth on 6.7% revenue expansion (read: Ten Predictions for the ETF Industry in 2017).

We have found a number of large-cap value ETFs, each of which touched a 52-week high on February 14.

Guggenheim S&P 500 Pure Value ETF (RPVFree Report)

iShares S&P 500 Value Index (IVEFree Report)

Vanguard S&P 500 Value Index ETF (VOOVFree Report)

SPDR S&P 500 Value ETF (SPYVFree Report)

Powershares Fundamental Pure Large Value (PXLVFree Report)

iShares Russell 1000 Value Index (IWDFree Report)

Powershares Dynamic Large-cap Value (PWVFree Report)

Investors should note that primarily dominated by large-cap stocks (about 80% of the portfolio), the following ETFs have some exposure to mid-cap stocks too.

iShares MSCI USA Value Factor (VLUEFree Report)

iShares Core US Value ETF (IUSVFree Report)

Fidelity Value Factor ETF (FVALFree Report)

The iShares S&P 500 Value Index ETF (NYSE:IVE) was trading at $105.06 per share on Wednesday afternoon, up $0.39 (+0.37%). Year-to-date, IVE has gained 3.63%, versus a 4.94% rise in the benchmark S&P 500 index during the same period.

IVE currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #7 of 76 ETFs in the Large Cap Value ETFs category.

This article is brought to you courtesy of Zacks Research.

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