VLU: Time for This Value-Focused ETF?

The U.S. equity markets are riding high to multi-year levels, delivering solid returns in excess of 20% YTD. This is largely thanks to the Fed easy money policy, improving economic conditions and decent earnings growth. However, this surge might not be sustainable heading toward the New Year based on various market perceptions.
 
Market Insights
 
According to some market experts, valuation appears a bit rich at current levels and earnings growth seems to be driven by cost cutting rather than revenue growth. This calls for potential downside in the equity markets. Further, one of the top investment banks – Goldman Sachs (GS) – expects the S&P 500 index to fall 6% in the next three months and 11% in the one-year time frame.
 
If this is not enough, a few billionaires like Warren Buffett, George Soros, and John Paulson are dumping their large holdings, suggesting that the market could try out corrections in the coming weeks.
 
Current Macro Trends
 
Moreover, global economic trends are still subdued. Though Europe is showing signs of recovery, falling inflation and record unemployment is stalling further growth. Financial growth in Germany has slowed and other countries like France, showed stability in the previous quarter, are shrinking yet again.
 
Japan is also seeing a slowdown and the emerging markets are still struggling to sustain growth. Plus, with the return of tapering talks, the emerging markets will likely continue to falter. Based on weakening global trends, the U.S. equity market might head toward a fall from its present peak as we close out the year.
 
How to Play?
 
In such a backdrop, investors should cash in on the currently surging stock prices, primarily those that are overvalued, or recycle their exposure to the undervalued ones. For investors seeking to play this trend, there are a few options, most notably SPDR S&P 1500 Value Tilt ETF (VLU).
 
The product has surged nearly 31% in the year-to-date period, clearly outpacing the broad market fund (SPY) by a wide margin. Despite this solid performance, the fund remains relatively unknown. In fact, the product has only amassed $7.9 million in assets and sees light volumes on most days. The ETF charges 0.35% in expenses.
 
Given this, it might be worth it to shed some light on this ETF and its holdings for those who are unfamiliar with the product, but are thinking about picking a value-oriented ETF for their portfolio. Below, we highlight some of the key details regarding VLU.
 
VLU in Focus
 
The fund uses sampling strategy and seeks to match the performance of the S&P 1500 Low Valuation Tilt Index, which applies an alternative weighting methodology to the S&P 1500 Index. The fund overweights the stocks that have relatively low valuations or are cheaper while underweight those stocks with relatively high valuations.
 
This strategy results in a large basket of 1438 securities, which are highly diversified and leave little in concentration risk. None of the securities hold more than 2.83% of total assets. Exxon Mobil (XOM), JPMorgan Chase (JPM) and Wal-Mart Stores (WMT) are the top three elements in the basket.
 
In terms of market cap, the fund puts more focus on large caps as these account for 82% share while mid and small caps take the remaining portion. However, the product is tilted toward financials with 22.98% share, closely followed by information technology (13.20%) and energy (12.31%).
 
Bottom Line
 
The product has been performing remarkably well since its debut a year ago. This trend is expected to continue going forward given the market insights and current macro trends. As such, investors should definitely take a look at this value-tilt ETF in order to protect their portfolio from any fall in the U.S. equity markets, while still holding great stocks.

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