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By Kenneth Lamont| 6-15-2017 11:00 AM

Smart Beta: What are Value ETFs?

In the first in our series explaining the different factors investors can add to their portfolios through strategic beta ETFs, Kenneth Lamont talks value

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Kenneth Lamont: For the first in our introduction to strategic or smart beta series I'm going to take a look at value. Value investing is one of the most popular and intuitive active investment strategies. Famously championed by Warren Buffett, it involves identifying and buying cheap or unloved stocks in the hope that the market has mispriced them and that they will rebound in price.

A stock's value is determined using one or more measures, commonly price-to-book or price-to-forward earnings and other accounting ratios. This allow one stock to be compared directly with another. The success of value investing can be explained by the market's tendency to overreact to both positive and negative news, tilting from greed to fear.

Like many factors, value is highly cyclical and can underperform for long periods of time. Value tends to outperform in strong macro inflationary environments. So, it can be expected to perform best in times of economic growth.

Being cyclical does mean that there will be periods, sometimes long periods, of underperformance. Value having lagged and underperformed for the best part of the decade came back strongly in 2016. The development of strategic beta funds now allows investors to systematically access the value stocks at a fraction of the cost charged by active managers. For example, our Bronze-rated iShares MSCI USA Value Factor ETF scores stocks on three separate value metrics and applies sector constraints in order to prevent sector biases.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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