Value investing is the process of using financial and non-financial tools to calculate the true value of companies and investing in these companies when the stock price is less than this true, or intrinsic, value.
This would usually require meticulous research and careful calculations. However, I’ve been looking into the idea of value investing through ETFs (exchange-traded funds) for my own portfolio. An ETF is a fund that tracks an index or sector and can be bought and sold like a share through most online brokers.
The ETF
I’ve been looking at Xtrackers MSCI World Value Factor UCITS ETF (LSE: XDEV), which tracks the MSCI World Enhanced Value Index. The index follows medium and large-sized firms in the developed world, with the companies selected based on three variables: price-to-book value, price-to-forward earnings, and enterprise value-to-cash flow from operations.
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I generally like ETFs as they offer me diversification through owning a single share. This ETF is well diversified across sectors and countries. The US accounts for the largest percentage of firms at over 40% of the fund. Japan represents the second-largest proportion at just under 25%. Firms from the UK constitute about 10% of the fund. Sectors covered include technology, financial services, and healthcare to name but a few. Companies in the fund include household names like Intel, Toyota, and International Business Machines (IBM).
Performance and outlook
It’s too early in the year to talk about year-to-date performance, but the fund has fared well over both the last 12 months and five years (up almost 30% and 40% respectively). That said, generally, the value sector has underperformed the wider market over the last few years. For example, over the last five years, the S&P 500 has increased by over 80%.
However, as we enter 2022 the economic backdrop is changing. Inflation is running high and there is a good chance that interest rates will trend upwards over the next coming years. In this scenario, it’s entirely possible that value stocks could do well.
For my portfolio
So, can I use this ETF as a hands-off approach to value investing? I think it’s possible.
Rather than pick individual shares on an ongoing basis, this ETF already covers a wider variety of firms and sectors. Moreover, the fact that the ETF is rebalanced twice a year means that the fund is constantly updated. In that respect, the ETF does the heavy lifting for me in terms of selecting companies.
Even so, there are limitations to this ETF. I can’t see how it takes into account the qualitative measures such as brand, business model, and competitive advantage. In the long run, factors like these are likely to be just as important to how the companies perform.
Despite the limitations of this ETF, as Warren Buffett said, “Price is what you pay. Value is what you get” and on balance I’m seriously considering adding this fund to my holdings as part of a balanced portfolio.
