This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today's article is by Scott Kubie, chief strategist of Omaha, Nebraska-based CLS Investments.
International value stocks look cheap. The iShares MSCI EAFE Value (EFV) is attractive compared with other diversified, developed international indexes and ETFs.
Compelling valuations, relative to the MSCI EAFE Growth ETF (EFG), make up the majority of the case for leaning diversified international portfolios toward value. Hopes for improved economic growth and a yield that rewards patience also support a lean toward value. Whatever your allocation to developed international markets, you should tilt the allocation toward value.
Under The Hood Of EFV
EFV invests in 513 stocks that exhibit value characteristics. The ETF maintains a roughly neutral country allocation compared with the parent portfolio, which removes biases in valuation across countries to a large extent.
EFV’s sector allocations vary from the parent index and EFG. EFV maintains a higher allocation toward financials (32% allocation) and energy (9% allocation). EFV meaningfully underweights consumer staples (2% allocation) and health care (6% allocation). The portfolio has a moderate bias toward utilities and real estate, and a moderate bias against industrials and technology.
How Undervalued Is EFV?
As noted above, low valuations make EFV compelling. Measured relative to EFG (which means EFG is always at 100%), the price-to-book value is at levels not seen since the tail end of the 2008 financial crisis. The price-to-book (P/B) chart shows relative valuations are reversing after an extended decline that started in early 2014.
In addition to comparing to EFG, the chart also shows the fundamentally weighted PowerShares FTSE RAFI Developed Markets ex-US Portfolio (PXF), which offers an alternative to EFV, and iShares MSCI EAFE Small-Cap ETF (SCZ). The chart shows the gap between small-caps and value widening in recent years. Value stocks look attractive relative to both
The price-to-sales (P/S) ratio shows a similar low level relative to recent history and a decline in recent years. The P/S ratio is at its lowest level, relative to EFG, in the last 10 years. Compared to international small-cap stocks (SCZ), it has usually traded at a slight premium.