Invesco FTSE RAFI U.S. 1500 Small-Mid ETF PRFZ is a contrarian fund that excels when beaten-down stocks round into form, but its broad reach, low turnover, and competitive fee should keep it on track even when they do not. 

This index strategy sweeps in the broad small-cap market and weights constituents by a blend of fundamental metrics, breaking the link between stocks’ prices and portfolio weightings. When the index rebalances each March, it effectively doubles down on stocks whose prices have waned relative to their fundamentals and trims exposure to the ones that have climbed. This approach can saddle the fund with stocks whose historical fundamentals don’t yet reflect their dim outlooks, and it can also prematurely cut back on winning stocks.

The benefits of this stubborn approach outweigh the drawbacks, though. By paring exposure to rising stocks and adding it to those that have tumbled, the fund mechanically buys low and sells high relative to fundamentals. This indiscriminate faith in battered companies should translate into market-beating returns if stock valuations revert to the mean.

A wide scope allows this fund to benefit from rebounding small-cap stocks across the market. It also diversifies risk. Fundamental weighting gives this fund a mild value tilt, but including a heavy dose of growth stocks ensures that performance relative to the Russell 2000 Index, its Morningstar Category benchmark, is not strictly a bet on value.

This fund has compiled a stellar track record, bookending tepid performance with two red-hot stretches of returns. That pattern is by design. The fund is built to erupt during periods of mean-reversion, like the six-month stretch following the market’s low point of the global financial crisis, when it trounced the Russell 2000  index by 35 percentage points. The fund may look lethargic at times, but its bursts of performance can tide it over during slower periods.

Analyst Rating

Wins by going against the grain.

Analyst

Ryan Jackson

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Prioritizing fundamentals over price has more benefits than drawbacks. It can cling to losing bets or prematurely trim exposure to winners, but the fund excels when stock valuations revert to the mean, and its broad reach keeps it out of trouble even when they don’t. It earns an Above Average Process Pillar rating.

Above Average

Process

Invesco’s equity index management team boasts a wealth of experience and strong supporting infrastructure, including analysts, traders, and technology platforms. It earns an Above Average People rating.

Peter Hubbard, Michael Jeanette, Tony Seisser, and Pratik Doshi are the named managers. Hubbard heads up the index portfolio management team. He has been with Invesco since 2005 and a portfolio manager since 2007. Jeanette leads the equity index team under Hubbard and has been a portfolio manager at Invesco since 2008. Seisser and Doshi joined the team in 2013 and 2018, respectively. These leaders oversee a broader team of experienced portfolio managers who assist with the portfolio’s day-to-day operations.

The team draws on a solid pool of resources from Invesco. Much of the workflow is automated, courtesy of the firm’s proprietary portfolio-management dashboard. A team of analysts assists with corporate actions and advises the team on necessary steps to anticipate upcoming index changes. Trade execution is handed to Invesco’s global trading desk, allowing the managers to focus on mitigating tracking error and tax efficiency. The team is subject to independent risk oversight.

People

Invesco, with USD 1.3 trillion in AUM, tries to cover a great many bases. The firm succeeds in a number of areas but also has its share of subpar offerings, along with many others somewhere in the middle. The firm retains a Morningstar Parent rating of Average.
Invesco is now 3.5 years past the closing of its merger with OppenheimerFunds. While there were some glitches, overall the process avoided the pitfalls that can accompany such corporate actions. On the positive side, Invesco’s international-equity teams—its EQV team in Texas and the New York-based group inherited from Oppenheimer—remain strong points. The firm’s ETF lineup includes the popular Nasdaq-focused QQQ; passive strategies make up around 30% of Invesco’s AUM. 
However, the extensive U.S.-equity lineup remains a weak link despite manager shuffles aimed at bolstering poor performers. The retirement of Meggan Walsh, who managed the relatively few appealing offerings in that group, didn’t help. Fixed-income offerings run the gamut: The multisector and short-term-bond areas are good, but corporate high-yield is less impressive.
Invesco has a substantial presence outside the U.S., but fund performance has been subpar in Asia, with manager turnover an ongoing concern. In the U.K. and Europe, the picture has brightened, but that region still can’t be considered a strength.

Average

Parent

Invesco FTSE RAFI US 1500 Small-Mid ETF

PRFZ tracks a fundamentally-weighted index of 1,500 small- and mid-cap companies in the US that are selected using fundamental metrics.

The Invesco FTSE RAFI US 1500 Small-Mid ETF (PRFZ) was launched on 09/20/2006, and is a smart beta exchange traded fund designed to offer broad exposure to the Style Box - Small Cap Blend category of the market.

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