There’s still plenty of talk about when value investing will rebound, but with the right approach, value isn’t on life support as some market observers would have investors believe.
Breathing new life into value via the WisdomTree U.S. Multifactor Fund (CBOE: USMF) could be the right way for advisors to approach value in this environment. USMF, which is a holding in several of WisdomTree’s Modern Alpha Model Portfolios, isn’t an ordinary value approach.
USMF tracks the WisdomTree U.S. Multifactor Index, which is generally comprised of 200 U.S. companies with the highest composite scores based on two fundamental factors (value and quality measures) and two technical factors (momentum and correlation).
The differences between USMF and traditional value funds are meaningful. Over the past 12 months, the WisdomTree fund is up almost 9% while the S&P 500 Value Index is higher by just 3.56%.
USMF Secret Sauce
While many value ETFs focus on prosaic metrics, such as price-to-book and price-to-earnings, USMF’s multi-layer approach goes further, providing a better mousetrap for capturing value exposure.
“On the opposite side of value, we look at quality ratios like return on equity (ROE), return on assets, and the trend change in these variables to get stocks with increasing earnings. This is also done within industries,” said WisdomTree Research Director Jeremy Schwartz in a recent note.
What’s remarkable about USMF is that it doesn’t rely on the many of the sectors typically found in old guard value ETFs. That’s a testament to the WisdomTree fund’s methodology, which isn’t rooted in price-to-book or price-to-earnings.
“Valuations of this multifactor strategy today display a value tilt similar to that of a traditional value index, but the strategy achieves those ‘low prices’ while being sector-neutral to the market,” notes Schwartz.
One way of looking at that scenario is that financial stocks dominate old school value benchmarks, but the sector is punishing investors this year owing to low interest rates. USMF’s methodology not only helps investors reduce exposure to the lagging sector, it turns up a better return on equity (ROE) profile, which actually enhances the fund’s value proposition.
“The Russell 1000 Value currently has an ROE of only 10%, compared to nearly 14% for the S&P 500, justifying its lower average P/E ratio. Notably, USMF currently has a lower P/E ratio than the Russell 1000 Value but a 90% higher ROE, and a higher ROE than the market,” according to Schwartz.
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