European investors drawn to value ETFs as US bull run continues

Mar 22nd, 2017 | By | Category: Equities

The top-selling Europe-listed ETF in February, a value-focused smart beta fund tracking US stocks, suggests investors are seeking to capitalise on the continuing US bull-run while avoiding companies with stretched valuations.

European investors drawn to value ETFs as US bull run continues

The top-selling Europe-listed ETF in February was the iShares Edge MSCI USA Value Factor UCITS ETF, pulling in over $600m in net new assets.

The iShares Edge MSCI USA Value Factor UCITS ETF (LON: IUVL) gathered over $600 million in net new assets last month, accounting for 6.3% of overall European-domiciled ETF inflows.

The fund’s assets under management is approximately $890m, an impressive amount given it only launched in October last year. It costs 0.20% in annual fees and focuses on US companies that are undervalued, relative to their fundamentals. The underlying index tracks 148 companies, with 23% in technology, 14.3% in financials and 13.6% in healthcare – sectors that are cyclical and perform well in a positive market environment.

The US bull run started in 2009, shortly after former President Barack Obama stepped into office, with the SPDR S&P 500 ETF Trust (NYSE ARCA: SPY) rising around 200% over the past eight years.

However, some analysts are now worried that US valuations appear overstretched. The iShares MSCI USA UCITS ETF (LON: CSUS) has a price-to-earnings ratio of 21.0 and the iShares Core S&P 500 UCITS ETF (LON: CSPX) has a similar P/E ratio of 20.9. Reflecting its value-focused nature, IUVL has a P/E ratio of 14.2.

Performance-wise, IUVL has fallen short of the broader market since the New Year. It gained 1.9%, compared to CSUS and CSPX which have both returned 4.3% to 22 March. Since launch, however, IUVL has edged ahead at 12.6% versus CSUS’s 10.6% and CSPX’s 10.7%.

BlackRock’s February ETP Landscape report explained that individual factor funds are likely to be highly cyclical, although they typically demonstrate positive returns over the long term.

“Since the US election, there has been a clear rotation from low volatility ETFs towards pro-cyclical factor exposures that tend to outperform in strong macro environments,” the report said.

Value factor ETFs have soaked up $2.1bn since the election on 8 November, compared to just $0.1bn in momentum funds. Defensive-focused, low volatility ETFs in Europe saw outflows of $1bn in the same timeframe.

There are several value ETFs available to investors apart from IUVL. The nearest competitor in terms of assets and fees is the $535m UBS MSCI USA Value UCITS ETF (LON: UC07) which costs 0.20%. The fund launched in 2012 and is only available in a GBP-listed share class after the USD ticker was delisted.

Another popular choice is the Ossiam Shiller Barclays Cape US Sector Value TR USD UCITS ETF (LON: UCAP) which boasts assets of $759m and one-year returns of 23%. UCAP uses the Cyclically Adjusted Price-to-Earnings (CAPE) ratio to time a sector-rotation strategy, seeking to identify and favour undervalued sectors and avoid those that are overvalued. The catch is the higher price tag of 0.65%.

The recent boost in overall equity ETF inflows will have certainly helped to push iShares’ IUVL, along with other value funds, to the top spot in February.

Lipper data found that equity ETFs saw their fifth consecutive month of the highest net inflows in the industry, gaining €6.1bn.

Net inflows and positive market impacts, said Lipper, pushed overall assets in the European ETF industry to €550.3bn at the end of February, up from €524bn the previous month.

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