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.
Gray’s Alpha Architect investment firm is one among a growing group of smaller money managers who are looking into the ETF space to attract investors and grow assets. While some may have been interested in Gray’s active strategies, many may not be comfortable with the fees for a small accounts. However, through an ETF, anyone can access the active strategies.
“Book readers and blog fans continually ask us if they can invest $10K, $20K, etc. with us,” Gray said. “But the reality of servicing small accounts means we would have to charge excessively high fees, something we simply don’t believe in. With an active ETF, we can manage any account of any size and at an affordable price.”
QVAL has a 0.79% expense ratio and IVAL has a 0.99% expense ratio.
For more information on smart-beta index funds, visit our indexing category.
Max Chen contributed to this article.