Performance shows not all value ETFs are created equal

Value shows signs of life following US election and vaccine news

Tom Eckett

a close-up of a fire

Value is starting to make a dramatic comeback following news of a coronavirus vaccine and Biden’s US election victory, however, investors looking to capture this trade must be aware each value ETF will deliver very different performance.

Investors will be well rehearsed in the record dispersion levels between value and growth with value lagging its rival by 41.2% at the trough on 1 September, according to data from Research Affiliates, the largest meltdown since 1931.

Highlighting this further, the MSCI World Value index was down 16.5% so far this year versus -0.1% for the MSCI World, as at 30 October.

However, the beleaguered factor has shown signs of life this week amid Pfizer’s announcement it had successfully tested a coronavirus vaccine on 9 November and Democratic candidate Joe Biden’s victory over President Donald Trump in the US election.

In response, the Russell 1000 Value index outperformed the Russell 1000 Growth index by 6% on 10 November, the highest daily excess return over the past decade.

Rob Arnott, founder and chairman of Research Affiliates, who has been very vocal about the extreme dispersions between value and growth stocks and the risks involved, said the reversal was long overdue.

When valuations are extreme, turns become inevitable, and a small shift in sentiment is often all it takes to initiate a swing of the pendulum from extreme fear to extreme euphoria,” Arnott said.

“The results over the last few days have been quite encouraging. It also bears mention that the valuation spread of value versus growth stocks continues to remain at a breathtakingly wide level. Long overdue for a reversal, value stocks are still priced to offer compelling return prospects, relative to their growth counterparts.”

Amid rising inflation and growth expectations in the US, investors have been rotating to value ETFs in recent months.

The $2.1bn iShares Edge MSCI World Value Factor UCITS ETF (IWVL) has seen $331m inflows over the past three months while investors have poured $238m into the $317m USB Factor MSCI USA Prime Value UCITS ETF (UBUS), according to data from ETFLogic.

Despite investors increasing their exposure to value, there has been a big dispersion in the performance of ETFs offering exposure to this factor over the past year.

According to data from Bloomberg Intelligence, the gap between the best and worst performing US value ETFs over the past year is 20%, as at 10 November, with the iShares Edge MSCI USA Value Factor UCITS ETF (IUVL) returning -4.9% while the $1.8bn Ossiam Shiller Barclays Cape US Sector Value UCITS ETF (UCAP) has risen 15.1%.

This performance differential can be found in two well-known indices, the MSCI USA Value and the Russell 1000 Value. FTSE Russell’s US value index offers exposure to 849 securities compared to 412 for MSCI’s version and also has a slightly heavier weighting to financials and industrials.

The increased diversification has meant the Lyxor Russell 1000 Value UCITS ETF (RUSV) has outperformed IUVL by 4.6% so far this year returning -2.9% versus -7.5% for IUVL, as at 11 November.

Not only is it about selecting the right factor but being able to understand the performance drivers of the different ETFs is crucial.

How risky are value stocks?

As Athanasios Psarofagis, ETF analyst at Bloomberg Intelligence, said: “It is a two-step process. Investors need to get the factor right but also the individual right as well.

“Labels tell investors very little about the ETF. As you can see, there are stark differences in construction and methodologies.”