almost 3 years ago • 4 mins
I recently made the case for value stocks looking extremely attractive right now: they’re cheap, they’re poised to benefit from economic recovery, and their momentum has finally turned positive.
What I didn’t dwell on was how best to invest in that trend. While the easiest way to do so is through exchange-traded funds, the various “value” ETFs out there can look confusingly different. So here are the key factors you should think about in order to choose the fund that’s right for you – as well as a few standout examples.
Fees have a nasty habit of being low enough not to raise red flags but high enough to end up eating into your long-term returns. After thirty years, an unassuming 0.25% management fee on a $100 investment returning 5% annually adds up to $34 you could have otherwise pocketed (or reinvested for even greater gains). Increase that fee to 0.5%, and you’ve lost out on over $66.2 – not nothing compared to your original investment of $100. Any ETF with an annual expense ratio above 0.3% requires careful cost-benefit analysis.
With that in mind, let's look at the largest, most liquid, and cheapest value ETF out there: the Vanguard Value ETF (ticker: VTV). For the low fee of just 4bps (0.04%), you get access to a diversified portfolio of 328 US large-cap stocks scoring positively on five of the most important valuation metrics. In practice this means a tilt towards the largest companies – and in terms of sector exposure, the ETF unsurprisingly leans towards financials (25%), healthcare (18%) and industrials (13%).
VTF is cheap, well-diversified, and relatively stable thanks to its focus on large US companies. For many investors, it may therefore be the most efficient way to gain long-term exposure to value stocks. For those who can’t access US-listed ETFs – or associated contracts for difference – the iShares Edge MSCI USA Value Factor UCITS ETF (IUVL) is a good substitute.
As previously discussed, US stocks trade at higher valuation multiples than their global peers – meaning you could snap up even cheaper stocks overseas. US-based investors might want to check out the iShares MSCI EAFE Value ETF (EFV), which is biased towards large-cap stocks in developed economies like Japan and the UK. The FlexShares Morningstar Emerging Markets Factor Tilt Index Fund (TLTE), meanwhile, focuses on small- and mid-cap stocks with value characteristics in emerging markets.
If you’re in Europe, you could consider the iShares Edge MSCI World Value Factor UCITS ETF (IWVL) for diversified global exposure (including to the US), and the iShares Edge MSCI EM Value Factor UCITS ETF ( EMVL) as a way to play emerging-market value with a bias towards China, Taiwan, and Korea.
Smaller value stocks could generate even higher returns than large-cap value stocks as the global economic recovery gathers pace. For investors looking to back small-cap value stocks in the States, the SPDR S&P 600 Small Cap Value ETF (SLYV) is a cost-efficient way of gaining broad exposure to this area. European investors might want to take a peek at the SPDR MSCI Europe Small Cap Value Weighted UCITS ETF (ZPRX)
While most ETFs define “value” by reference to traditional ratios like price-to-earnings, some fund providers argue these measures are outdated. The Distillate US Fundamental Stability & Value ETF (DSTL), for example, focuses on “free cash flow yield” (calculated as free cash flow/enterprise value) as a truer guide to cheapness. Perhaps even more sophisticated is the Roundhill Acquirers Deep Value ETF (DEEP, bro), which uses a secret valuation sauce that even includes checks for earnings fraud.
An interesting European option here is the Ossiam Shiller Barclays Cape Europe Sector Value TR UCITS ETF (LCPE). Rather than buying undervalued companies, this fund looks to buy undervalued sectors. But what you have to keep in mind is that such supposedly superior metrics could come at the cost of higher complexity and fees and lower transparency: you could end up owning a “value” fund that behaves very differently from what you’d expect.
The Nuveen ESG Large-Cap Value ETF (NULV) focuses on bigger value stocks that satisfy strict sustainability criteria, while the Invesco S&P SmallCap Value with Momentum ETF (XSVM) screens on the basis of both value and momentum characteristics. These factors may well be important to you – although these funds are unfortunately only available to investors with access to US-listed ETFs.
As we’ve seen, “value” can be defined in all sorts of slightly different ways – so it’s important to make sure you understand exactly what exposure you’re getting when you adopt the theme. The good news is that if you believe in a specific spin on the value play, then there’s almost certainly an easy-access ETF out there giving this expression.
My personal preference is to keep things simple. While I agree that traditional value measures have their shortcomings, the current alternatives don’t seem much more appealing: the benefits of “smarter” value ETFs are likely to be offset by their extra cost and complexity.
When it comes to size and geographic tilt, however, I favor a global exposure to smaller-cap value stocks. For more detail on why that’s the case, check out some of the Related Content below.
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.