ETFs for Inflation
We’ve initiated coverage of twelve new equity ETFs, including five actively managed ETFs, four “ESG” funds (short for Environmental, Social and Governance criteria), and one fund-of-funds (Table 1). However, none of those caught our eye as especially noteworthy or attractive.
The one that did was the Brand Value ETF (BVAL). As the name suggests, the objective of the fund is to identify and track undervalued U.S. companies based on the value of their brand. With an expense ratio of 65 basis points, the fund is expensive for a U.S. equity ETF, although not uncommonly so for small, new entries to the ETF market.
Table 1: New ETFs Under Coverage
| Ticker | Name | Expense (bp) | Active Mgmt. | Fund of Funds | ALTAR |
| BVAL | Brand Value ETF | 65 | N | N | 7.2% |
| NUEM | NuShares ESG Emerging Markets Equity | 45 | N | N | 6.8% |
| LVIN | Hartford Multifactor Low Volatility Int’l Eq. | 39 | N | N | 6.4% |
| NUDM | NuShares ESG Int’l Developed Markets Equity | 40 | N | N | 6.2% |
| CSML | IQ Chaikin U.S. Small Cap | 35 | N | N | 5.9% |
| GDVD | Principal Active Global Dividend Income | 58 | Y | N | 5.9% |
| VMOT | Alpha Architect Value Momentum Trend | 79 | N | Y | 5.8% |
| YLDE | ClearBridge Dividend Strategy ESG | 59 | Y | N | 4.8% |
| LVUS | Hartford Multifactor Low Volatility US Equity | 29 | N | N | 4.8% |
| CCOR | Cambria Core Equity | 105 | Y | N | 4.6% |
| CACG | ClearBridge All Cap Growth | 53 | Y | N | 4.5% |
| LRGE | ClearBridge Large Cap Growth ESG | 59 | Y | N | 4.4% |
Source: ETF Research Center and FactSet
Investors including Warren Buffet know how valuable a good brand name can be, but the trouble is in measuring that value since it is an intangible asset (unless it is acquired, in which case it becomes goodwill that, perversely enough, is depreciated over time even though it may well be an appreciating asset). The methodology behind BVAL seeks not only the measure brand value, but then to screen for and invest in companies that are trading at a discount to that brand value.
Typically we’ve taken such alternative valuation measures with a grain of salt. (We’re not casting aspersions here, just reserving judgment.) What stands out to us about BVAL is that that fund’s ALTAR Score™—our rating of an ETF’s overall investment merit—of 7.2% is considerably higher than for the S&P 500 SPDR (SPY), which has an ALTAR Score™ of 5.8% (Table 2).
What’s significant about that is the denominator in that equation, the forward price-to-book value multiple (P/BV), is based on old-school accounting and valuation methods, and yet firms in BVAL still trade at cheaper P/BV multiples than their counterparts in SPY, despite achieving a slightly higher level of profitability (average Return on Equity, or ROE) over the course of the business cycle.
This suggests to us that stocks in BVAL look like a relative bargain even if their brand values are not understated on the balance sheet! If they are understated, that’s just icing on the cake that could eventually turn into future share price gains.
Table 2: Calculation of ALTAR Score™
| Avg. ROE 2012-17E (A) |
Forward P/BV (B) |
Expense ratio (C) |
ATLAR Score™ (A/B)–(C) |
|
| Brand Value ETF (BVAL) | 18.0% | 2.3x | 65 bp | 7.2% |
| S&P 500 SPDR (SPY) | 16.1% | 2.7x | 9 bp | 5.8% |
Source: ETF Research Center and FactSet
What do you think? Is the market failing to capture the real value of strong brands?
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