Industry Updates

Is value set for a comeback? European ETF investors think so

Tom Eckett

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Value ETFs saw some of the biggest inflows across all European-listed ETFs last week as investors bet on a rebound in the factor that has delivered decade-long underperformance.

According to data from Ultumus, the iShares Edge MSCI Europe Value Factor UCITS ETF (IEVL) and the iShares Edge MSCI USA Value Factor UCITS ETF (IUVD) were both in the top 10 for highest inflows in the week to 19 June with combined inflows of $484m.

Overall, net inflows into value ETFs listed in Europe totalled $532m last week.

Value investors have had a torrid time since the Global Financial Crisis (GFC) underperforming wider market cap weighted indices in every year barring 2009 and 2016.

Furthermore, during the coronavirus turmoil that sent shockwaves through markets, value underperformed in both the downturn in March and the rebound a month later.

Quantifying when value will return from the dead

Highlighting this – to take the most broad-based of indices – the MSCI World Value index returned -29.2% in Q1 versus -23.2% for the MSCI World. However, when markets started to rally in April the MSCI World outperformed its value relative by 2.3%.

However, the big names in quantitative investing are backing value to make a comeback. Cliff Asness, co-founder and CIO of AQR Capital Management, have told investors not to miss out on value’s extraordinarily cheap levels.

In a May white paper, Asness said: “Value is exceptionally cheap today, and it gets cheaper (and becomes clearly the cheapest ever) the closer our analysis gets to realistic implementations.

“We think the medium-term odds are now, rather dramatically, on the side of value, with no ‘this time is different’ explanation we can find…and no other period in the 50+ year history matching today.

“It has certainly been excruciating getting here, but here we are, and it has never looked cheaper going forward.”

Value’s underperformance highlights systemic problem with smart beta

ETF investors in Europe are clearly confident this rebound is set to take place but this has been called many times over the past decade.

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