There are many ASX ETFs available to investors that aim to utilise different strategies.
Sometimes these focus on generating passive income through dividends.
Other strategies focus on targeting high growth companies.
However a new report from VanEck has shed light on the success of value investing over the last 5 years.
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What is value investing?
The core ethos of value investing is the understanding that the market isn't always accurate with pricing a company's intrinsic value.
The key to identifying a value share is that it has an inexpensive valuation compared to the value of its assets or key financial metrics, such as revenue, earnings or cash flow.
It's the strategy most associated with the common investing phrase 'buy low, sell high'. The value investor seeks out value stocks trading below their book value.
VanEck Msci International Value ETF
The team at VanEck harnessed this idea in the VanEck Msci International Value ETF (ASX: VLUE).
This ASX ETF tracks the MSCI World ex Australia Enhanced Value Top 250 Select Index (VLUE Index).
VanEck said it believes this is the most representative expression of the value factor available on ASX.
VLUE does not include small caps, which have diluted the returns of some other value exposures, and with only 250 high-conviction holdings, it avoids the watered-down approach of broader value indices that hold hundreds of stocks with varying degrees of value characteristics.
Because it is rules-based, it does not drift from its style, nor is there the key-man risk associated with active funds.
Additionally, VanEck said some 'value' companies are cheap for a reason, and these could be 'value traps'.
MSCI analysis found that using forward earnings can help protect against 'value traps'.
Therefore, MSCI developed its Enhanced Value Indices, which apply three valuation ratio descriptors on a sector-relative basis:
- Price-to-book value
- Price-to-forward earnings
- Enterprise value-to-cash flow from operations.
Value outperforming
Since this ASX ETF was first listed 5 years ago, it has had a great track record of outperforming other investment strategies in this period.
It is up almost 66% in that span.
For comparison, the S&P/ASX 200 Index (ASX: XJO) is up approximately 28% in that same period.
VanEck said this success has come from using a unique strategy compared to a traditional value approach.
MSCI's enhanced value overcomes many of the criticisms of value because it puts less weight on price-to-book as a metric and moves away from backward-looking dividend yield altogether. It uses a whole-firm valuation measure in enterprise value that could reduce concentration in leveraged companies.
