Finding Value in Value ETFs

They didn’t pullback by much on Tuesday, but a lower close is a lower close and a number of ETFs representing blue chip value stocks from AT&T (NYSE: T) to Johnson & Johnson (NYSE: JNJ) are sliding deeper into oversold territory heading into midweek.

Anyone who has been paying attention to these stocks over the past few weeks likely is not surprised by this. With financials and technology leading the way higher in the first month of 2012, there has been precious little buying enthusiasm for the Pfizers (NYSE: PFE) and Procter & Gambles (NYSE: PG) of the world.

Although the weakness in this sector has been somewhat persistent, there are signs that the selling may be done in many of these more defensive names. Most immediately are the ratings upgrades being earned by some of the leading value ETFs like the Vanguard Value ETF (NYSE: VTV), the iShares S&P 500/Barra Value Index Fund ETF (IVE: NYSE), and the iShares Russell 1000 Value Index Fund ETF (NYSE: IWD).  Upgrades in these ETFs could be the prelude to buyers returning to these markets.

All three of these exchange-traded funds earned ratings upgrades as of Tuesday’s close. The most significant may be the upgrade in the Vanguard Value ETF, which boosted the fund’s “consider buying” rating to 10 out of 10, our highest rating possible. This means that VTV has pulled back to levels where, historically speaking, traders have been more eager to buy than sell in the short-term. Heading into trading on Wednesday, shares of VTV have a short-term edge of more than 1%.

Both IWD and IVE have similar, if slightly lower, positive edges in the short-term, and earned ratings upgrades to 9 out of 10 as a result of their fourth consecutive lower close on Tuesday. Only recently have all three funds consistently traded in bull market territory, climbing back above their 200-day moving averages at the beginning of January. As such, the current pullback represents the first for each fund since returning to the bullish side of the 200-day.

IVE is based on the S&P 500 Value Index. VTV is designed to follow the MSCI U.S. Prime Market Value Index. IWD tracks the Russell 1000 Value Index. Traders interested in leveraged options in the value equity market may want to consider the ProShares Ultra Russell 1000 Value ETF (NYSE: UVG). UVG is built to provide twice the daily return of the Russell 100 Value Index.

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David Penn is Editor in Chief of