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Finding the right value ETF

iShares Edge MSCI World Value Factor should benefit if the value rally continues
Finding the right value ETF
  • Vanguard Global Value Factor UCITS ETF is set to close in February
  • iShares Edge MSCI World Value Factor UCITS ETF offers similar exposures at a competitive price
  • It may prove less volatile than Vanguard Global Value Factor UCITS ETF and is less reliant on the US market
  • iShares Edge MSCI World Value Factor UCITS ETF has generally not beaten active value funds
IC TIP: Buy at 2434p

Value investing may have enjoyed  a comeback towards the end of 2020 but not all funds will be around to capitalise on future outperformance. Such is the story of Vanguard Global Value Factor UCITS ETF (VVAL), which will close in late February along with three other factor-based Vanguard ETFs due to “insufficient European investor interest” in the product range.

The closure may come as a surprise and disappointment. This ETF has amassed more than $200m (£163.1m) since its 2015 launch, and successfully capitalised on the cyclical rally sparked by news of a Pfizer vaccine in November when it made a total return of 14.3 per cent.

We include this fund in our 2020 Top 50 ETFs list because its shares can be very liquid due to its decent size and its 0.22 per cent ongoing charge is very competitive.

However, another global value option highlighted by some of the expert panel who helped put together the IC Top 50 ETFs list is iShares Edge MSCI World Value Factor UCITS ETF (IWFV). This fund should also prove to be highly liquid, given its substantial size – it had nearly $3.5bn in assets under management as of 15 January. This should make trading iShares Edge MSCI World Value Factor UCITS ETF cheap and straightforward. An ongoing charge of 0.3 per cent means that it is also cheap to hold even if it is more expensive than Vanguard Global Value Factor UCITS ETF.

Briegel Leitao, a Morningstar associate analyst who specialises in passives and is an IC Top 50 ETFs panellist, thinks that the fund stands out because it offers a broadly similar form of exposure to Vanguard Global Value Factor UCITS ETF.

“iShares Edge MSCI World Value Factor offers investors diversified value exposure to large-cap stocks at an attractive fee,” he says. “The fund focuses on underpriced developed market equities and selects the cheapest stocks from each sector.”

Like many other factor-based funds, the ETF takes a rules-based approach. It tracks MSCI World Enhanced Value index, which is composed of large- and mid-cap stocks listed on 23 developed markets that exhibit “higher value characteristics”. Companies are included in this index based on their price to book value, price to forward earnings and enterprise value to cash flow from operations.

While the fund has a value focus, some of its investment parameters may limit the risks involved. Restricting the fund’s remit to bigger stocks in developed markets should limit some of the volatility involved, for example. Like many other passive vehicles it also tends to hold a wide array of companies and had 402 holdings as of 15 January, making it much more diversified than many active equity funds. For example, Jupiter Global Value Equity (GB00BF5DRJ63) had 37 holdings at the end of November. Ninety One Global Special Situations (GB00B29KP103) had 45 holdings at the end of December, Schroder Global Recovery (GB00BYRJXP30) had 53 and Fidelity Global Special Situations (GB00B8HT7153), which can take a long/short approach, had 109.

ES River and Mercantile Global Recovery (GB00B9428D30), meanwhile, which has a more quantitative approach, had 423 holdings at the end of November.

Although iShares Edge MSCI World Value Factor UCITS ETF has a bias to the information technology sector, it has exposure to a spread of different sectors. Its 10 largest holdings, which represented around a fifth of its assets, ranged from healthcare companies Pfizer (US:PFE) and Abbvie (US:ABBV) to British American Tobacco (BATS), car maker Toyota (JAP:7203), and tech stocks Intel (US:INTC), Micron Technology (US:MU) and Broadcom (US:AVGO), as of 15 January.

 

 

iShares Edge MSCI World Value Factor vs Vanguard Global Value Factor

iShares Edge MSCI World Value Factor UCITS ETF has a large-cap bias, unlike Vanguard Global Value Factor UCITS ETF. In theory, the large-cap bias should lessen iShares Edge MSCI World Value Factor UCITS ETF's volatility in a market sell-off but also limits the gains it might make during a value rally.

iShares Edge MSCI World Value Factor UCITS ETF is a more conventional factor-based product than Vanguard Global Value Factor UCITS ETF. Vanguard classes its ETF as “actively managed” because while it uses a quantitative model to assign weightings to certain stocks, its investment manager can tweak the weightings, essentially making active decisions on certain exposures. iShares Edge MSCI World Value Factor UCITS ETF, by contrast, invests according to set rules and criteria so may be more predictable.

These two ETFs differ notably in their regional allocations. Vanguard Global Value Factor UCITS ETF had 64.1 per cent of its assets in the US at the end of 2020, with 18 per cent in Europe and 14.5 per cent in Asia Pacific including Japan, Korea, Hong Kong and Australia.

iShares Edge MSCI World Value Factor UCITS ETF had 40.3 per cent of its assets in the US and 26.5 per cent in Japan, as of 15 January. Less reliance on the growth-heavy US market could be a good thing.

Other regional allocations were much smaller, with 9.5 per cent in the UK, 7.6 per cent in France and 4.4 per cent in Germany.

 

iShares Edge MSCI World Value Factor UCITS ETF top 10 country allocations 
Country% of assets
US40.3
Japan26.5
UK9.5
France7.6
Germany4.4
Hong Kong2.0
Spain1.7
Canada1.6
Italy1.4
Netherlands1.2
Source: iShares, 15 January 2021

 

iShares Edge MSCI World Value Factor UCITS ETF's biggest sector allocations in mid-January were information technology, financials and healthcare. Vanguard Global Value Factor UCITS ETF’s biggest sector weightings were financials, industrials and consumer discretionary.

 

iShares Edge MSCI World Value Factor UCITS ETF sector breakdown

Sector% of assets
Information technology22.7
Financials12.7
Healthcare12.6
Consumer discretionary11.3
Industrials10.6
Communication8.8
Consumer staples7.5
Materials5.0
Utilities3.2
Energy2.8
Source: iShares, 15 January 2021

 

And iShares Edge MSCI World Value Factor UCITS ETF recently had 402 holdings while Vanguard Global Value Factor UCITS ETF had 1,243 stocks at the end of 2020.

 

Performance versus passive preference

Vanguard Global Value Factor UCITS ETF delivered a sterling share price total return of 73 per cent over the five years to 15 January 2020 compared with 58.4 per cent for iShares Edge MSCI World Value Factor UCITS ETF. Vanguard Global Value Factor UCITS ETF also delivered a slightly stronger return during the November rally.

Performance

Fund/benchmark6-month total return (%)1-year total return (%)3-year cumulative total return (%)5-year cumulative total return (%)
iShares Edge MSCI World Value Factor UCITS ETF11.61-3.19-0.6758.39
Vanguard Global Value Factor UCITS ETF24.741.150.6772.95
MSCI World index10.4710.6032.84106.63
Source: FE, 15 January 2021

 

But Vanguard Global Value Factor UCITS ETF’s superior track record stems in part from a particularly strong 2016. And iShares Edge MSCI World Value Factor UCITS ETF is ahead in calendar years 2017, 2018 and 2019, possibly reflecting some of the differences outlined earlier.

iShares Edge MSCI World Value Factor UCITS ETF has generally underperformed the active value funds mentioned above over the past five years. However, this ETF has outperformed the MSCI World index at moments of value outperformance. And it may be suitable if you want a broad form of value exposure at a low price, rather than paying higher fees to an active manager in the hope that they find the best contrarian shares.

With Vanguard Global Value Factor UCITS ETF exiting the market, iShares Edge MSCI World Value Factor UCITS ETF offers an alternative way to get passive global value exposure at an attractive price. It invests in a broad spread of stocks that score well on value metrics and should continue to benefit if the recent value rally plays out for longer. Buy. DB

 

iShares Edge MSCI World Value Factor UCITS ETF (IWFV)
Price2,434pSet-up date3/10/14
Fund typeExchange traded fundTotal expense ratio0.30%
Market cap£2.57bn*Benchmark indexMSCI World Enhanced Value
Number of holdings402Frequency of rebalancingSemi-annual
Product structureHolds physical securitiesPrice/earnings ratio12.73
Source: iShares, 15 January 2021
*Currency conversion as of 19 January 2021

 

Top 10 holdings
HoldingSector% of assets
IntelInformation technology4.8
AT&TTelecomms2.8
Micron TechnologyInformation technology2.4
International Business MachinesInformation technology2.1
ToyotaConsumer discretionary1.9
British American TobaccoConsumer staples1.6
BroadcomInformation technology1.5
AbbvieHealthcare1.3
PfizerHealthcare1.3
HitachiInformation technology1.3
Source: iShares, 15 January 2021