State Street Global Advisors, the asset manager behind the SPDR brand of ETFs, has replaced the indices underlying its Europe-domiciled US and European value ETFs, asserting that value investing works.

Mandy Chiu, Head of EMEA and APAC SPDR Product for SPDR ETFs at State Street Global Advisors.

The SPDR MSCI USA Value UCITS ETF and SPDR MSCI Europe Value UCITS ETF, which trade on the London, Frankfurt and Zurich exchanges, have adopted the MSCI USA Value Exposure Select Index and MSCI Europe Value Exposure Select Index respectively as their new underlying reference indices.

They previously tracked the MSCI USA Value Weighted and MSCI Europe Value Weighted indices.

The end product of the changes will be a higher conviction exposure to the value factor, at the expense of increased portfolio turnover and greater tracking error (vs. parent indices).

Whereas the old value-weighted indices tilted the funds towards stocks with lower valuations, the new indices more aggressively target stocks exhibiting value characteristics whilst seeking to avoid poor quality companies.

The indices are constructed by including the 125 securities from the parent country index (MSCI USA and MSCI Europe respectively) with the highest final combined value-quality score. This score is based on forward price to earnings, enterprise value/operating cash flows and price to book value for the value component; and return on equity, debt to equity and earnings variability for the quality component.

The 125 securities are assigned weights according to their market cap weight multiplied by combined value-quality score. The weights are then updated to implement sector neutrality with the parent index, subject to a constituent cap of 5% where excess weights are redistributed to the constituents of the corresponding sector proportionately.

Mandy Chiu, Head of EMEA and APAC SPDR Product for SPDR ETFs, said: “The performance of the MSCI Value Exposure Select Index challenges the perception that value investing no longer works. There has been this widely-held view in the market that many value strategies have underperformed, but research demonstrates that the very high value exposure offered by the MSCI Value Exposure Select Index delivered returns in excess of the MSCI USA Index over the past 10 years.”

She added: “We believe good factor strategies should provide high exposure to the targeted factors while keeping untargeted exposures in check. The value funds now reflect the latest thinking in value investing, integrating strong value exposure with a quality filter which looks to avoid the value trap. Altering the benchmark for these funds responds to client demand for greater intensity in their value orientation.”

Value ETFs today make up the second largest category in the European smart beta/factor ETF market, growing from less than 5% of the market in 2006 to around 18% of the market in 2018, according to Bloomberg.

The SPDR MSCI USA Value UCITS ETF trades on the Deutsche Börse in EUR (ZPRU GY), on the LSE in GBP (UVAL LN) and USD (USVL LN), and on SIX Swiss Exchange in CHF (UVAL SW). It has assets under management of $31.8m and a total expense ratio (TER) of 0.25%.

The SPDR MSCI Europe Value UCITS ETF trades on the Deutsche Börse in EUR (ZPRW GY) on the LSE in GBP (EVAL LN), and on SIX Swiss Exchange in CHF (EVAL SW). It has AUM of just €3.3m and a TER of 0.25%.

The revamped funds will likely compete with the iShares Edge MSCI Europe Value Factor UCITS ETF EUR (Acc) which has €1.37bn in assets and a TER of 0.25%, and the iShares Edge MSCI USA Value Factor UCITS ETF with $1.48bn in assets and a TER of 0.20%. Both funds are listed across the same European exchanges as the SPDR products.