Foreign Value Factor ETFs Update

Back on November 24, 2017, I published a post entitled Best Foreign Value Factor ETFs. In that post, I looked at several options and attempted to compare and contrast them on the road to picking one for purchase.  Since we just finished up the first quarter of 2018, I though I would take a look at the performance of these options since the prior post.

In the prior article, I discussed why I was planning to allocate some additional funds to non-U.S. equities.  My reasons for this decision are probably obvious based on prior posts such as: Resource Roundup: Research Affiliates Asset Allocation Tool and Resource Roundup: More CAPE.  Basically, they are cheaper than U.S. equities and I believe in the value factor and that relative valuations matter.

So let’s look at the 2017 annual returns and the Q1 2018 returns for the ETFs I covered last time [All figures are from fund sponsor sites and/or Morningstar (a stock which I track as a potential purchase, BTW) and are total return based on fund NAV (as opposed to market price which may reflect premiums or discounts]:

 ETF                             2017                                     Q1 2018 

EFV                             21.22%                                  (2.15%)

VYMI                           22.37%                                  (.79%)

IVAL                            30.34%                                  (2.16%)

DWM                           23.45%                                  (1.96%)

FNDE                           26.18%                                  3.92%

FNDF                           23.81%                                  (2.30%)

IEFA                             26.42%                                  (1.39%)

VXUS                           27.52%                                  (.45%)

VWO                            31.38%                                  2.09%

VTI                               21.16%                                   (.59%)


Now for some observations.  The first thing I note is that VXUS (Vanguard total ex-U.S.) beat most comers in 2017 (the lone exception was IVAL).  As I discussed in the prior post, IVAL is a little different from the others in that it only contains about 50 stocks and there is  a pretty strong quality filter (and generally no balance sheet financial stocks).  It is offered by Wes Gray and company at Alpha Architect.  Authors of this, this and this.  I own IVAL in one of my accounts where I am experimenting with and equal allocation to value and quality factor exposures.  It it makes me rich, I will be sure and have one of the cabin boys on my yacht let you know.

I guess the cap-weighted flex should be expected as Alibaba, Baidu,, etc…all performed strongly last year.  Those aren’t in the value “cuts.”  If you will recall, I concluded that I would employ the market cap weighted funds for much of this allocation (especially the emerging markets exposure).  It looks like that might have been an ok decision.

I do note that FNDE, which is emerging markets value via a RAFI index, has performed very strongly.  Especially in Q1 2018, when it topped my charts (and beat cap weighted VWO).  This is interesting, because it still appears very cheap with only around a 10 P/E and a sub 1.0 P/S ratio (the IVAL portfolio is similarly cheap).

It is also interesting because BMO’s Jeremy Grantham has been sort of pounding the table on emerging market value stocks, and I’m not aware of a lot of other (cheap) exposures available to retail peons like myself.

I did buy some FNDF after my prior post.  It looks like that was a good decision, versus EFV (the other EAFE value fund) for 2017, but EFV outperformed in Q1 of 2018.  Yet, both of these value funds lost out to the cap weighted alternative (IEFA).  It seems like it will require a rebound in EAFE financial stocks (and maybe energy) for the value premium to rally back in EAFE stocks.

There is no guarantee that will happen, but given the historical data on the global value premium (as well as the behavioral and risk-based logical justifications for the continuation of said premium), I believe that a resurgence in value is likely a good long-term bet.  The U.S. financials have been performing stronger than anyone expected pre-Trump (albeit not strong enough to catch the FANG stocks…..yet) and maybe the EAFE stocks are just a few years behind.

Thanks for reading!