An ETF Tale of Two Styles (Part 3)

Morningstar's Alan Rambaldini looks at 'growth' and 'value' equities and the ETFs that track them

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The current style-focused ETFs available track indices from one of two index providers; MSCI and STOXX. Let's look at each index providers’ offering in turn.


MSCI uses eight different variables in constructing their eurozone style indices, three forward looking, three current, and two historical:

-         Long-term forward earnings per share growth rate
-         Short-term forward earnings per share growth rate
-         Price-to-12-month-forward earnings ratio
-         Current internal growth rate
-         Price-to-book ratio
-         Dividend yield
-         Long-term historical earnings per share growth trend
-         Long-term historical sales per share growth trend


For comparison purposes, Morningstar's style ratings place equal emphasis on forward-looking metrics (50%) and historical and current metrics (the remaining 50%).


STOXX offers two different families of style indices covering both Europe and the Eurozone: the STOXX Europe TMI Style Indices and the STOXX Strong Style Indices. The TMI style indices are subsets of the European/Eurozone TMI indices which cover about 95% of the free-float market capitalisation of European equity markets. Companies are divided into growth and value styles through six factors divided equally into forward-looking, historical, and current measures:

-         Projected price-to-earnings ratio
-         Projected earnings growth
-         Trailing price-to-earnings ratio
-         Trailing earnings growth
-         Price-to-book ratio
-         Dividend yield


With only 20 components, the STOXX Strong indices are more concentrated. They also adhere to a unique weighting methodology: the shares of eligible companies are weighed according to each company's style 'purity', as defined by the six factors listed above. They are also subject to a cap which prevents them from representing more than 15% of the index’s value. The STOXX Europe Strong Style Composite 40 index and EURO STOXX Strong Style Composite 40 Index combine both of their relevant style indices.


Stylish ETF in the future
According to a 1998 paper by John Bogle, "The Implications of Style Analysis for Mutual Fund Performance Evaluation" high returns are directly associated with low fees. A 2000 paper by James Davis, "Mutual Fund Performance and Manager Style" found that the track record for actively-managed style funds compared to their benchmarks is poor. And even when active funds are ranked by their relative value and growth exposures, the highest decile of value funds don't actually hold much in the way of value stocks. Investors looking to add style exposure, and especially value exposure, to their portfolio might find style ETFs to be a suitable alternative.


Although Hong Kong market has not yet expanded the ETF scope to stylish ETF, it’s about time for investors to study them. Hong Kong ETF market has recently grown at a breathtaking pace and therefore the launch of stylish ETFs, which are gaining popularity in the United State and Europe, is only a matter of time.  


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Morningstar ETF Analysts  research hundreds of ETFs available to European investors. The Morningstar Rating for ETFs is based on a risk-adjusted performance measure

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