What are we looking for?
Top-performing ETFs that tilt clearly toward growth or value.
The screen
As central banks continue to signal the gradual reduction of interest rates, equity investors are likely pleased, given that borrowing costs for the companies they invest in also begin to fall. This generally means companies will have access to (slightly) cheaper capital through issuing debt. For companies in growth mode, this allows for greater flexibility in terms of capital expenditures and funding R&D. Lower interest rates also mean value investors might use a smaller discount rate when valuing stocks, which increases their fair-value estimates. To help investors on both ends of the spectrum, today I use Morningstar Direct to help find clear-cut ETF plays in both areas. To find these investments, I screened the universe of 1,500-plus Canadian-listed ETFs for those that:
- are classified via the Morningstar Style Box as decidedly Value or Growth. The classic Morningstar Style Box (which was first introduced in 1992) classifies funds as large-cap, mid-cap or small-cap, based on the market capitalization of the fund’s stock holdings. Morningstar also classifies funds as value, blend or growth, based on the value or growth orientation of the fund’s stock holdings. The nine possible combinations of these characteristics correspond to the nine squares of the style box: Size is displayed along the vertical axis, and style is displayed along the horizontal axis. Today’s screen essentially excludes “blend” funds and looks for those that are clearly in the value or growth boxes;
- have received a Morningstar Rating for Funds (informally known as the “star rating”) which depicts after-fee, historical risk-adjusted returns against peers. The rating uses 10 years’ worth of performance history when possible, putting the greatest emphasis on the past three years. Though the rating is backward-looking, Morningstar’s data shows that, on aggregate, five-star funds outperform four-star funds, which outperform three-star funds, and so on, in periods after receiving said rating;
- have received a Morningstar Medalist Rating of Gold, Silver or Bronze. This rating is our analysts’ assessment of an ETF’s ability to outperform peers on an after-fee basis in the future. The rating is arrived at by analyzing three core pillars: people (quality of the management team), parent (stewardship of the fund company) and process (robustness of investment decision-making). I note here that the process pillar is weighted less for passive (index) ETFs.
Only Canadian-domiciled ETFs were considered in this screen.
What we found
The ETFs that qualified are listed in the accompanying table, alongside their trailing performance, MERs, inception dates, ratings and style tilts according to our style-box methodology. I’ve also denoted whether each fund is actively/passively managed, or if it’s a strategic beta (also known as “smart beta”) fund. Strategic beta funds are rules-based investment vehicles that systematically tilt toward a certain style of investment. This is important to note in today’s screen to help understand whether the exposure to value or growth is purposeful (in the case of active managers) or coincidental (in the case of passive strategies). The list is sorted first by style tilt, then on category (an important delineator given ratings for each fund are relative to category peers) then by three-year annualized returns.
This article does not constitute financial advice, it is always recommended to conduct one’s own independent research before buying or selling any of the funds or ETFs mentioned in this article.
Ian Tam, CFA, is director of investment research for Morningstar Canada.
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