Getting Value Exposure from Non-Value Funds

Oil, financial, and China ETFs versus value funds

January 2024. Reading Time: 10 Minutes. Author: Nicolas Rabener.

SUMMARY

  • The factor betas of value-focused ETFs range dramatically
  • Non-value-focused funds can have high betas to the value factor
  • However, these often come with large unintended bets

INTRODUCTION

While some investors are die-hard believers in value investing, others regard this more opportunistically and only occasionally seek exposure to this investing style. Perhaps cheap stocks have been outperforming, or the investor may regard the economic outlook as favorable for value over growth stocks. The number of reasons for allocating to value stocks is likely as large as the number of ways of defining them.

However, aside from asking when is a good time to allocate to cheap stocks, there is also the question of how to best achieve this. Investors have the choice between creating a portfolio by selecting cheap stocks themselves or paying a fund manager to do so. The former is cheaper, while the latter is easier.

Smart beta ETFs may be considered a compromise between the do-it-yourself approach and selecting an active mutual fund manager. Most of these ETFs track indices that clearly describe how stocks are selected and are cheaper than mutual funds. However, there are more than 50 smart beta ETFs focused on value stocks in the U.S. stock market, ranging from Vanguard’s Value ETF (VTV) which manages $104 billion and charges a 0.04% management fee to Roundhill’s Acquirers Deep Value ETF (DEEP) with $37m and a 0.80% management fee.

In this research article, we will explore a few considerations when evaluating value-focused smart beta ETFs and mutual funds, as well as funds that provide exposure to the value factor without having an explicit focus on cheap stocks.

FUNDS RANKED BY THE VALUE FACTOR

Investors consider multiple criteria when evaluating funds like the assets under management, fees, active share, portfolio concentration, and so on. Although obvious, a fund should be doing what its product name says, eg a smart beta value-focused ETF should provide exposure to the value factor.

We select five smart beta ETFs and one mutual fund that focus on value investing in this analysis. We run a factor exposure analysis using the S&P 500 an