Deep-Value ETF Report: 22 December 2020

Widespread rallies across the major asset classes in recent history have left few opportunities for bargains in the waning days of 2020. The main exception: energy and certain slices of the commodities markets. Otherwise, the catch from deep-value fishing is light, based on 140-plus exchange-traded funds covering stocks, bonds, property shares, and commodities on a global basis.

The concept of value investing has been on the defensive in recent years, thanks to relatively weak performance vs. expectations promoted by the long-run track record. Debate rages about whether this corner of portfolio strategy – favoring assets that appear to trade at discounts to some measure of inherent worth – has run out of road. The harshest critics warn that buying assets on the cheap and expecting to earn a relatively high-risk premium for the effort is past its shelf life. Hogwash, counter value’s true believers. A periodic dry spell for the strategy is par for the course and so the glory days will eventually return. Patience is the price of doing business. On the basis, overweighting the value factor will continue to deliver for portfolio design and asset allocation.

Or so we’re told. While we’re waiting for Mr. Market to render judgment, let’s inspect the wares by ranking value opportunities (or the lack thereof) via a performance lens. The metric of choice for “deep value” in this column is the 5-year return, which is based on an idea outlined in a paper by AQR Capital Management’s Cliff Asness and two co-authors:  “Value and Momentum Everywhere,”  published in a 2013 issue of the Journal of Finance. There are numerous value metrics and so no one should confuse the 5-year-performance benchmark as the definitive measure of bargain-priced assets. But as a starting point in the process of identifying where the crowd’s expectations have stumbled, the 5-year change is a useful metric.

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