ROUS: A Risk-First Approach to Value Investing

In the wake of recent bank collapses and related volatility, ROUS may offer a way to invest in US value with more thoughtful exposure to the financial sector.

What You Need To Know

Severe yield-curve inversions such as the one we’re currently experiencing have historically been associated with financial/credit-related recessions.
The traditional value universe tends to be overweight to the financial sector.
Hartford Multifactor US Equity ETF (ROUS) may offer US value exposure with less volatile and less concentrated exposure to the financials sector.

Something we haven’t seen much of during this Federal Reserve (Fed) rate-hiking cycle is the connection between the Fed’s actions and the overall economy. Markets were relatively complacent in early 2023, but this complacency was likely misplaced: The Fed has never hiked this aggressively before without causing a deep bear market (FIGURE 1). Similarly, the yield curve¹ has never been so inverted for so long without causing a recession.

Previous yield-curve inversions this severe were often associated with financial/credit-related recessions as well as deeper, longer bear markets. Why? Banks borrow short and lend long. It follows intuitively, then, that volatility associated with aggressive rate hikes can disproportionately impact financials by making many of their activities less economical.

Figure 1

Rate Hikes This Aggressive Have Often Coincided With Deep Downturns
S&P 500 Index drawdowns and inverted Fed funds rate % (1954–3/31/23)

As of 3/31/23. Past performance does not guarantee future results. Indices are unmanaged and not available for direct investment. Federal funds rate (orange line) trending down indicates hikes and trending up indicates cuts. The federal funds rate is the target interest rate set by the Federal Open Market Committee that banks use to lend to each over overnight. Sources: Bloomberg and FRED.

ROUS: Access to Value Without Excess Financials Exposure

Hartford Multifactor US ETF (”ROUS”) seeks to provide investment results that, before fees and expenses, correspond to the total return performance of an index that tracks the performance of exchange-traded US equity securities.

Value can be particularly sensitive to this type of financial-related volatility: The traditional value universe is noticeably overweight financials (18% for the Russell 1000 Value Index vs. 13% for the Russell 1000 Index). This is why Hartford Multifactor US Equity ETF (ROUS) may be a better way to access value without this excess exposure to financials.

ROUS is diversified across sectors to prevent concentration in any one sector. Take financials: ROUS has about half the financials exposure of the Russell 1000 Value Index (FIGURE 2). Similarly, ROUS had just 2.6% bank exposure compared to 7.4% for the Russell 1000 Value Index (as of 3/10/23 when regulators closed the Silicon Valley Bank).

Banks also tend to be higher-volatility holdings. ROUS seeks a volatility-reduction target of up to 15% over a full market cycle, which often helps it avoid the riskiest stocks and industries. For example, the financial stocks ROUS holds have below-market beta,² while the financial holdings in the Russell 1000 Value Index have above-market beta (FIGURE 3).

Figure 2

Financial Sector Weights
LROLCX vs. Russell 1000 Value Index (2004–3/31/23)

As of 3/31/23. LROLCX is the underlying index ROUS tracks and has a longer track record than the Fund itself. Source: Compustat. Calculations by Hartford Equity Modeling Platform.

Figure 3

Financial Holdings: ROUS vs. Russell 1000 Index
3-Year Weighted Average Beta

As of 3/31/23. Sources: Hartford Funds Equity Risk Model, 3/23.

In short, recent financial-related volatility highlights the potential advantages of our strategic-beta approach: Our systematic, rules-based index methodology is designed to simultaneously address risks while seeking exposures to return-enhancing factors. In this case, ROUS can offer value exposure with a more thoughtful exposure to financials.

For more information on ROUS, talk to your financial professional.

¹ Yield curve is a line that plots interest rates of bonds having equal credit quality but differing maturity dates; its slope is used to forecast the state of the economy and interest-rate changes.
² Beta is a measure of risk that indicates the price sensitivity of a security or a portfolio relative to a specified market index.

Russell 1000 Index measures the performance of the large-cap segment of the US equity universe.
Russell 1000 Value Index is an unmanaged index measuring the performance of those Russell 1000 Index companies with lower price-to-book ratios and lower forecasted growth values.
S&P 500 Index is a market capitalization-weighted price index composed of 500 widely held common stocks.

All information as of 3/31/23 unless otherwise noted. Sector exposure is subject to change. For current sector exposure, visit the fund detail page.

Important Risks: Investing involves risk, including the possible loss of principal. Security prices fluctuate in value depending on general market and economic conditions and the prospects of individual companies. • The Fund is not actively managed but rather attempts to track the performance of an index. The Fund’s returns may diverge from that of the index. • Investments focused in an industry or group of industries may increase volatility and risk.

Diversification does not ensure a profit or protect against a loss in a declining market.

The views expressed here are those of the authors. They should not be construed as investment advice. This material and/or its contents are current as of the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Hartford Funds.

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Insight from Hartford Funds

Lewis Ratti, MBA

Senior Investment Director

Bill Pauley, CFA

Head of Client Portfolio Management Group

Adam Schreiber, CAIA

Client Portfolio Analyst