Smart beta exchange-traded funds (ETFs) offer investors a different look as opposed to the run-of-the-mill passive index strategy, but where does an investor look to get started in this strategic space? How about the biggest ETF in terms of assets–$48.26 billion–all to the Vanguard Value Index Fund ETF Shares (NYSEArca: VTV).
VTV seeks to track the performance of a benchmark index that measures the investment return of large-capitalization value stocks. The fund employs an indexing investment approach designed to track the performance of the CRSP US Large Cap Value Index, a broadly diversified index predominantly made up of value stocks of large U.S. companies. The advisor attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index.
Thus far in 2019, VTV is up 14.36 percent. Its rise comes after a shaky end to 2018 as investors are picking themselves up in 2019, but rather than deep-diving into the capital markets headfirst, they’re picking their spots and deploying capital more strategically.
Value Isn’t Dead
However, one of the challenging aspects advisors face with this more cautious investor is the plethora of options available, especially in the ETF space. Where are the opportunities in ETFs given the current market landscape challenged by obstacles such as trade war fears?
A market-capitalization-weighted index provides clients with exposure to a particular market based on security prices, without considering any true company fundamental to judge its value. However, the Great Recession of 2008 roiled investors with deep declines that they were not anticipating, as a result of overexposure to potentially overpriced stocks relative to their true value.
As such, things began to change, with many financial advisors shifting to smart beta strategies in the past 10 years. The first aspect to touch upon was the limitations of a market cap weighted index, which would then warrant the need for smart beta and factor strategies.
Given certain market conditions, investors need more than just a passive index that goes beyond a one-size-fits-all template that uses market cap weighting. While these indexes provided simple, low-cost solutions, the need for even greater scrutiny is necessary in the quest for more alpha —a case for smart beta.
Through smart beta, investors get adaptable exposure with the rules-based approach in conjunction with reaping the rewards of diversification via access to a broad market index. In addition, the simplicity of buying a broad-based market index has a concentration of risk, and should a market correction ensue comparable to that witnessed in the fourth quarter, investors are left vulnerable.
As such, smart beta strategies can be segmented into alternatively weighted, single factor and multi factor strategies–the latter to diversify concentration in a specific factor–low or minimum volatility, momentum, size, quality, yield, and value.
Speaking to the latter, while 2018 saw the height of the extended bull market run, value took a back seat to growth. Fast forward to today and the number of investors flocking to holdings company Berkshire Hathaway’s annual meeting shows that value is anything, but dead–with Berkshire Hathaway CEO and value investing purveyor Warren Buffett serving as the value investor’s iconic figure.
“The characteristics of Buffett followers include: they are very interested in investing, and especially value investing; they have little to occupy their time before the meeting begins on Saturday; and many of them are concentrated in downtown Omaha,” said Creighton University professor Gerald Jensen. “Therefore, offering a value investing panel on the Creighton campus the evening before the Berkshire meeting is a logical move.”
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