What are we looking for?
Equity exchange-traded funds that lean toward value and profitability, and have also beat their peers.
The screen
Over the past decade and thanks to the explosive growth in technology companies in particular, growth investors have outperformed value investors. But in the wake of market volatility and a higher interest rate environment, it seems the tide has begun to turn. Case in point, looking at the U.S. category for large cap value and large cap growth funds, the former group has outperformed the latter on a year-to-date basis by a whopping 24.5 per cent. The 2021 calendar year showed a much smaller discrepancy with large cap value funds outperforming large cap growth funds by 5.7 per cent.
For ideas along this vein that might help tilt your equity portfolio toward the value style (and in light of the fact that Canadian mutual fund categories do not have a style-specific tilt), I used Morningstar Direct to screen for equity ETFs from Canadian-domiciled fund companies that currently have aggregate price-to-earnings ratios near or below their respective category averages, while at the same time maintain a portfolio-level return on equity that is above the same category average. Moreover, I screened for five-star funds, or those that have outperformed their peers on a trailing risk-adjusted basis after fees.
What we found
The ETFs that met the above requirements are listed in the table accompanying this article, alongside their management expense ratios, star rating, trailing performance, select aggregate valuation multiples (P/E, price-to-book, price-to-sales), and return on equity. Below funds’ names are category average statistics. It’s worthwhile noting that most of the qualifying funds are considered “smart beta” ETFs. As a reminder, these products use systematic investment processes to maintain exposure to particular factor (quality, dividend, low volatility, etc.) at a fraction of the cost of an active manager. That said, none of the ETFs listed here targets value specifically.
Investors are urged to first look at the category to which each fund belongs, to determine whether the geographic exposure of each fund makes sense for your overall asset allocation.
This article does not constitute financial advice. Investors are encouraged to conduct their own independent research before purchasing any of the investments listed here.
Ian Tam, CFA, is director of investment research for Morningstar Canada.
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Ian Tam, CFA