Value investing is headed back into vogue amid rising interest rates and geopolitical tensions. While there are several ETF issuers focused on the space, Brandes Investment Partners’ new value-focused active ETFs could offer an attractive option.
Brandes Investment Partners, known for being one of the first investment firms to invest globally using a value investing approach, recently launched its first ETF offerings in conjunction with the Goldman Sachs ETF Accelerator. The three new value-focused active ETFs aim to capitalize on short-term security mispricing and market irrationality to pursue long-term returns.
“Expanding our fund complex to include active ETFs represents our response to evolving investor demands and our commitment to broadening access to Brandes’ strategies. We’re excited to bring these Brandes value solutions to clients in an ETF wrapper,” said Marsha C. Otto, CFA, Director, Mutual Fund Sales & Portfolio Management.
Why Value Investing?
Growth stocks have handedly outperformed value stocks over the past decade thanks to rock-bottom interest rates. However, since cash flows from growth stocks extend farther in the future, the discounted value of those cash flows is more sensitive to interest rates. Therefore, rising interest rates could begin to jeopardize growth stock valuations.
Value stocks also offer an attractive ‘margin of safety,’ meaning the intrinsic value sits closer to the market price. In some cases, a stock’s intrinsic value could even be higher than the market price. As a result, in an era of rising geopolitical risk, value stocks could provide investors with a less risky alternative to growth stocks since there’s less room to fall.
Ultimately, value stocks aim to deliver a higher risk-adjusted return rather than absolute return. While they may never match growth stocks during a bull market, they tend to fall less during a bear market, creating a net advantage over their growth-oriented counterparts.
BINV: International Value
The Brandes International ETF (BINV) seeks long-term capital appreciation by investing in equity securities of non-U.S. issuers. The fund employs a disciplined, bottom-up investing approach to find companies trading below their intrinsic value. In particular, the managers may look at earnings, cash flow generation, or net asset value to make these assessments.
According to the fund’s prospectus, the fund managers may invest up to 5% of the portfolio in any one company and more than 20% in any market sector. Moreover, up to 30% of its total assets may be invested in emerging and frontier market securities. These guardrails translate to diversified exposure to a broad range of international markets.
Currently, the fund’s largest holdings include popular large-cap companies like Takeda Pharmaceutical Co. Ltd. (3.72%), Heineken Holding NV (2.52%), and Alibaba Group Holding (2.43%).
BUSA: Domestic Value
The Brandes U.S. Value ETF (BUSA) seeks long-term capital appreciation by investing in the equity securities of U.S. issuers with equity market capitalizations of more than $5 billion at the time of purchase. The fund managers use the same bottom-up approach as the international-focused BINV to select companies trading at a discount to their intrinsic value.
According to the fund’s prospectus, the fund managers may invest up to 5% of total assets into a single company and more than 20% into any market sector. And at least 80% of its net assets will be invested in U.S. companies under normal market conditions. These are broadly defined as companies generating more than half their revenue from U.S. goods and services.
Currently, the fund’s largest holdings include companies like Chevron Corp. (3.70%), Comcast Corp. (3.24%), Halliburton Co. (3.23%), McKesson Corp. (2.79%), and Merck & Co. Inc. (2.76%).
BSMC: Small-to-Mid Cap Value
The Brandes U.S. Small-Mid Cap Value ETF (BSMC) seeks long-term capital appreciation by investing in U.S. equity securities of small- and mid-capitalization companies that the fund managers believe are undervalued. Unlike the large-cap space, there are often more opportunities to seek out value among smaller companies due to their greater number.
According to the fund’s prospectus, the fund managers typically invest at least 80% of total assets in small- tomid-cap companies in the Russell 2500 Index. These companies have market capitalizations ranging from $17.9 million to $17.1 billion. And like the previous funds, it may hold up to 5% in any single stock and more than 20% in any sector.
Currently, the fund’s largest holdings include companies like Amdocs Ltd. (2.46%), Edgewell Personal Care Co. (2.43%), National Western Life Group (2.26%), Chesapeake Energy Corp. (2.14%), and Quest Diagnostics Inc. (2.07%).
Alternatives to Consider
Brandes Investment Partners isn’t the only ETF issuer focused on value investing opportunities. Avantis and Dimensional Advisors are two other popular issuers laser-focused on active value funds that have already drawn in billions of dollars worth of assets. Meanwhile, others like iShares has some indexed value ETFs, focused on international markets, that have posted decent performance this year to date.
Indexed and Active Value ETFs
These funds are selected based on YTD total return, which range from -2.5% to 12.4%. Their expense ratios are between 0.15% to 0.33% and their AUM is between $200M to $8.2B. They are currently yielding between 0.5% and 5.2%.
| Name | Ticker | Type | Actively Managed? | AUM | YTD Total Ret (%) | Yield (%) | Expense |
|---|---|---|---|---|---|---|---|
| Capital Group Dividend Value ETF | CGDV | ETF | Yes | $2.86B | 12.41% | 1.8% | 0.33% |
| iShares MSCI Japan Value ETF | EWJV | ETF | No | $207M | 14.03% | 2.9% | 0.15% |
| iShares MSCI Intl Value Factor ETF | IVLU | ETF | No | $1.75B | 7.51% | 5.2% | 0.30% |
| Avantis US Large Cap Value ETF | AVLV | ETF | Yes | $1.5B | 3.85% | 0.5% | 0.15% |
| Avantis US Small Cap Value ETF | AVUV | ETF | Yes | $6.6B | 0.98% | 1.9% | 0.25% |
| Dimensional US Targeted Value ETF | DFAT | ETF | Yes | $7.7B | -0.41% | 1.6% | 0.28% |
| Dimensional US Marketwide Value ETF | DFUV | ETF | Yes | $8.2B | -1.05% | 2.1% | 0.22% |
| Dimensional US Large Cap Value ETF | DFLV | ETF | Yes | $933.2M | -1.45% | 2.1% | 0.22% |
| Avantis US Small Cap Equity ETF | AVSC | ETF | Yes | $422.8M | -2.58% | 1.6% | 0.25% |
When choosing between these options, it is critical to look beyond total return and assess risk and expense. While actively-managed funds may be more expensive, they may offer improved risk-adjusted returns and better handle market downturns. On the other hand, passively-managed funds tend to have lower costs and match market returns in more normal conditions.
The Bottom Line
Brandes Investment Partners’ newly launched active ETFs provide investors with new options for value-focused exposure to various market subsets. While they aren’t the only value-focused ETF issuer, you may want to consider them for their heavily diversified portfolios and extensive track record of value investing in the mutual fund world.