Along with the number of broad index-based exchange traded funds available, investors can also take a look at actively managed styles that can add value to an investment portfolio.
For instance, the ValueShares U.S. Quantitative Value ETF (BATS: QVAL) and the recently launched ValueShares International Quantitative Value ETF (BATS: IVAL) try to implement Wesley Gray’s, a former finance professor at Drexel University, quantitative value strategies. The quantitative value ETFs try to exploit behavioral biases in the market by tapping into undervalued stocks. [ValueShares Adds to Quantitative Lineup With International ETF]
Specifically, the two ValueShares ETFs select company stocks based on value metrics, forensic accounting screens and quality metrics to target the cheapest and highest-quality value stocks, writes Rick Roberts for Financial Advisor.
ValueShares tries to eliminate any company 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 then 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 also selected on low enterprise values relative to operating earnings. [Capture an Undervalued Market with This Active ETF]
Additionally, the quantitative value ETFs will try to maintain a portfolio that has a lower correlation with the broader market and does not focus on any single area of the market. For instance, QVAL’s top four holdings include a healthcare, consumer discretionary, consumer staple and technology companies.
“We systematically avoid closet-indexing,” Gray said in the FA article.