RWJ - RWJ: Undervalued SMID Mix With A Quality Issue Caution Is Warranted

2024-05-03 22:00:00 ET

Summary

• RWJ has a passive strategy that puts emphasis on small-caps with meaningful revenues.
• Investors have a few reasons to consider RWJ, major among them being its appealing valuation, but all of them are insufficient when the quality question is raised.
• The problem is its too small allocation to stocks with a B- Quant Profitability grade, weak ROA, and large exposure to overleveraged companies.
• Neither RWJ's factor mix nor its past performance justify a Buy rating.

One of the key themes on which I have been focusing as an analyst is finding a perfect balance between growth, value, and quality factors. Unfortunately, it is frequently the case that an ETF offers impressive value exposure but almost no quality and no growth. It might be the contrary, i.e., stellar growth but horrible valuation, totally disconnected from reality. One of the examples that has solid value characteristics, with just a tiny bit of growth and, sadly, too soft quality, is the Invesco S&P SmallCap 600 Revenue ETF ( RWJ ), a smart-beta vehicle that I previously covered in November 2023....

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