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Adding Value To The Developed Markets Trade

ETF Professor

Value stocks in the United States are scuffling against broader benchmarks and growth stocks. While ex-US developed markets value stocks are also trailing relevant benchmarks, the value factor is performing better outside the U.S. this year than it is on a domestic basis.

For example, the iShares MSCI EAFE Value ETF (BATS:EFV) is up about 14 percent year-to-date compared to a gain of around 17 percent for the MSCI EAFE Index. EFV tracks the MSCI EAFE Value Index, the value offshoot of the widely followed MSCI EAFE Index.

EFV makes good on the value promise. The ETF has a price-to-earnings ratio of 14 compared to 18 on the iShares MSCI EAFE ETF (NYSE: EFA). EFV could be getting its turn to shine. After all, concerns that the aging bull market in the U.S. is presenting investors with fewer and fewer value opportunities is one of the primary reasons why investors have been flocking to ex-US developed markets ETFs this year.

Inside The Value Play

The traditional MSCI EAFE Index holds over 900 stocks, but EFV's roster is comprised of less than 500 members. EFV allocates about 53 percent of its combined weight to Japan, the U.K. and France, which is mostly inline with the 52 percent allocation to those countries found in the standard MSCI EAFE Index.

Germany, Switzerland and Australia combine for about 23 percent of EFV's weight compared to 25 percent in the MSCI EAFE Index. Some investors often assume value stocks are less volatile than their growth counterparts. While that's usually the case in the U.S., EFV's three-year standard deviation of 13.2 percent is slightly above the 12.5 percent found on the MSCI EAFE Index.

As has been seen in the U.S. in recent years, value is lagging overseas as well. Over the past three years, EFA has topped EFV by almost 4-to-1 margin and from 2011 through 2016, the value ETF outperformed its traditional cousin on just two occasions.

One Sector Looms Large

EFV shares something in common with U.S. value funds: a large weight to the financial services sector. However, in the case of the ex-US value ETF, its exposure to the sector is quite massive. EFV devotes over 35 percent of its weight to financial services stocks, more than triple the ETF's second-largest sector weight, which is industrials.

With the MSCI Europe Financials Index up more than 22 percent this year, EFV is clearly benefiting from that trend. Conversely, the ETF would be vulnerable to a retrenchment in European bank stocks. Still, investors appear comfortable embracing EFV. The ETF hauled almost $296 million in new capital last week, good for the seventh-best total among all US-listed ETFs.

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