Article: Track down value

The emergence of so-called smart beta exchange-traded funds (ETFs) has allowed investors to gain low-cost nuanced exposure to financial markets.

These products select a basket of stocks based on certain criteria. This could be volatility, yield, growth, momentum or earnings quality. Another measure used is value. There are downsides to pursuing a value investment strategy using ETFs.

Most such products will select stocks based on a quantitative screen of a wider index such as the MSCI World or MSCI USA. However, unlike an actively managed mutual fund with a value focus there is no manager to avoid those stocks which are cheap for a reason. This is at least partly mitigated by the inherent diversification within the ETF.

According to ETF investing tool justETF there are 16 value ETFs on the London Stock Exchange. These products use a variety of different metrics to identify value. Below we take a closer look at the top five by fund size.

UBS ETF MSCI USA Value (UC07) £48.50

Fund size: £336 million

Replication method: Physical

Over the last three years this ETF has achieved a return of 42.5% for a total expense ratio of 0.2%. It tracks the MSCI USA Value index which identifies value stocks based on three key variables. Book value to price, 12-month forward earnings to price and dividend yield. It has 322 constituents with ExxonMobil (XOM:NYSE), Microsoft (MSFT:NDQ) Johnson & Johnson (JNJ) among the largest.

Ossiam Shiller Barclays Cape US Sector Value (CAPU) £370.93

Fund size: £169 million

Replication method: Synthetic

Launched in February 2015 this ETF aims to replicate the performance of the Shiller Barclays CAPE US Sector Value index. It is relatively expensive with a TER of 0.65% but this in part reflects its scarcity value. It uses the CAPE or cyclically-adjusted price to earnings (PE) ratio, popularised by Bob Shiller, to identify and provide exposure to four undervalued US sectors and updates on a monthly basis. The CAPE is essentially an ordinary PE averaged out over a decade.

iShares MSCI World Value Factor (IWFV) £18.43

Fund size: £163 million

Replication method: Physical

This product was launched in October 2014 and has a total expense ratio of 0.3%. Income is reinvested rather than distributed to holders. It reweights the parent MSCI World index to undervalued stocks based on four variables. Sales, book value, earnings and cash earnings. The US accounts for more than 40% of the ETF, with financials the biggest exposure on a sector basis at 18.5%.

Ossiam Shiller Barclays Cape Europe Sector Value (LCPE) £235.70

Fund size: £84 million

Replication method: Synthetic

Uses the same methodology as its US counterpart to identify value stocks, is up 12.6% year-to-date and also has a total expense ratio of 0.65%. The four sectors to which it is currently providing long exposure are Energy, Materials, Telecommunication Services and Utilities. It includes stocks from Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the UK.

db X-trackers Equity Value Factor (XDEV) £19.56

Fund size: £73 million

Replication method: Physical

This product, which has a total expense ratio of just 0.25%, tracks a selection of stocks from the MSCI World index weighted according to value. The two measures of value used are operational yield – whereby the lower a company is valued against its earnings the higher its operational yield – and dividend yield. Income is reinvested rather than distributed.