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Extract US value with PowerShares ETF

Experts says that US equities are expensive, but the PowerShares FTSE RAFI US 1000 UCITS ETF picks out better value holdings.
March 11, 2015

The US stock market had a great 2014 and defied many experts who regarded it as too expensive. While uncertainty hung over a number of economic areas last year, US economic growth continued to be strong with its gross domestic product (GDP) growth up 2.4 per cent. Company earnings are supportive and there has been a pick-up in capital expenditure, as well as increased business activity and confidence. Mergers and acquisitions are also back on the agenda as cash-rich companies look to invest.

IC TIP: Buy at 1003.5p
Tip style
Growth
Risk rating
High
Timescale
Long Term
Bull points
  • Value tilt
  • Limits exposure to highest valuations
  • Could mitigate US market downside
  • Robust research methodology
Bear points
  • Underperformed S&P 500 over one year

UK investors are generally underweight to the US market: on a market-cap-weighted basis US companies account for 56 per cent of global equity markets, which is many times greater than that of the UK at 8.4 per cent. Yet according to Investment Association statistics, the combined assets in the North American and North American Smaller Companies sectors represent just 7.1 per cent of total equity funds under management, so UK investors could look to increase their exposure.

However, Adrian Lowcock, head of investing at AXA Wealth, says: "The US market is not a sure-fire bet, share valuations are high and the strong US dollar is likely to have an impact at some point as it makes the country less competitive globally. At the moment, we favour large companies with a focus on the US economy."

Headline market figures do not reflect the situation with every stock, so a solution might be a fund that picks out shares with better valuations. Active fund managers have struggled to add value in the mature US market so a good option might be PowerShares FTSE RAFI US 1000 UCITS ETF (PSRF). This exchange traded fund (ETF) tracks an index weighted on fundamental attributes such as revenue, cash flow, balance sheet strength and dividends - as opposed to market capitalisation. In practice, this means it reins back exposure to some of those stocks with the highest valuations.

The FTSE RAFI US 1000 Index tracks the performance of the largest US equities and selects them based on four fundamental measures of company size: book value, income, sales and dividends. The 1,000 equities with the highest fundamental strength are weighted by their fundamental scores.

Since the ETF's launch in November 2007 its net asset value (NAV) return has been 7.61 per cent, against 6.23 per cent for the broader S&P 500 Index. It has underperformed this index in NAV terms over one year, but beat it over three and five years.

The NAV performance of the ETF has tracked the benchmark index closely. However, the ETF's share price has not tracked its index closely over three and five years, according to Morningstar data. But Ben Seager-Scott, director of investment strategy at Tilney Bestinvest, says: "As these markets get more and more expensive the downside risk gets greater. So a fund with a tilt to a value style might be better because it might mitigate some downside, as the valuations of its holdings are not as eye-wateringly expensive."

The fund has an ongoing charge of 0.39 per cent, which is more than some plain vanilla S&P 500 trackers, which can cost as little as 0.09 per cent. However, Mr Seager-Scott argues that the specialist underlying strategy and very robust and solid research methodology is worth paying more for. But he adds that it is important you spend time getting to grips with the potential consequences of more complicated underlying methodologies such as this.

If you want to add some exposure to the US but forego eye-watering valuations and mitigate possible downside, PowerShares FTSE RAFI US 1000 UCITS ETF is worth a look. Buy.

 

POWERSHARES FTSE RAFI US 1000 UCITS ETF (PSRF)

PRICE:1,003.5pONGOING CHARGE:0.39%
SIZE OF FUND:$260.97mNUMBER OF HOLDINGS:1,026*
LAUNCH DATE:21 November 2007BASE CURRENCY:US dollar
INDEX:FTSE RAFI US 1000MORE DETAILS:invescopowershares.co.uk
REPLICATION STRATEGY:FULL*

Source: Morningstar & *PowerShares

 

Share price performance vs key indices

 1-year share price return (%)3-year cumulative share price return (%)5-year cumulative share price return (%)
PowerShares FTSE RAFI US 1000 ETF20.663.683.4
FTSE RAFI US 1000 TR USD22.875.4103.8
S&P 500 TR GBP25.071.8102.6

Source: Morningstar, as at 6 March 2015

 

Top 10 holdings

Holding%
ExxonMobil 2.5
AT&T 1.8
JPMorgan Chase 1.7
Chevron 1.7
General Electric1.6
Wells Fargo1.6
Bank of America 1.5
Apple1.5
Pfizer1.3
Citigroup1.2

 

Sector allocation

Sector%
Financials20.8
Information technology12.2
Consumer discretionary11.6
Healthcare11.4
Industrials10.8
Consumer staples10.1
Energy10.1
Utilities4.9
Materials3.8
Telecommunication services3.6

Source: PowerShares, as at 9 March 2015