The recently launched actively managed exchange traded fund, ValueShares U.S. Quantitative Value ETF (BATS: QVAL), tries to exploit behavioral biases in the market by tapping into undervalued stocks.
Drexel University finance professor Wesley Gray, the co-author behind Quantitative Value, crafted QVAL based on five factors, including identifying target stocks, forensic accounting screens, valuation screens, quality screens and investment preferences.
Specifically, Morningstar strategist Samuel Lee points out that the ETF starts out with a universe of large- and mid-cap stocks and excludes stocks with market caps below the 4th percentile of the NYSE; takes out mortgage REITs, royalty trusts, ETFs, ETNs, CEFs, ADRs, and SPACs; and sets aside financials.
Then, ValueShares tries to eliminate any companies with dubious finances or accounting schemes, along with stocks with operating cash flows that persistently fall behind net income, volatile financial statement ratios, high leverage and rapid sales growth.
The remaining picks are sorted by earnings before interest and taxes, or EBIT, over total enterprise value, or TEV. TEV is equal to market cap plus debt, minus excess cash, preferreds and minority interests. Stocks are selected on low enterprise values relative to operating earnings. Lee argues that in back-tested data, the strategy’s value comes from its EBIT/TEV, providing a more discriminatory take on value than traditional ratios like price-to-earnings and price-to-book.
Moreover, component stocks are picked for quality. For instance, companies with strong finances and economic moats are selected.
Lastly, the firm singles out the cheapest and highest quality value stocks left over.
“We fundamentally believe in a classic value investment approach, which means we focus on the common stock of firms with low prices relative to fundamentals,” according to ValueShares.
QVAL currently has a heavy tilt toward consumer cyclical stocks at 25.2% of the portfolio, followed by healthcare 20.4%, tech 15.4% and basic materials 12.4%. Top holdings include Edwards Lifesciences (NYSE: EW) 2.9%, Apollo Education Group (NasdaqGS: APOL) 2.7%, Cisco (NasdaqGS: CSCO) 2.7%, Magna International (NYSE: MGA) 2.7% and Apple (NasdaqGS: AAPL) 2.7%.
The ETF was launched October 22, has $14.6 million in assets and has a 0.79% expense ratio. [ValueShares Makes ETF Debut With Quantitative Value ETF]
For more information on active strategies, visit our actively managed ETFs category.
Max Chen contributed to this article.