With interest rates rising sharply in Canada and across the world, the investment landscape has shifted dramatically. Over the past several years, growth stocks have been strongly outperforming value stocks.
This hasn’t always been the case, and history shows us that value tends to outperform over the long term.
Our current economic environment offers the perfect tailwinds for value to relatively outperform growth. After doing some analysis, here are some of the best value ETFs in Canada.
Value vs. Growth
When you are investing in the stock of a company, you are investing in its future cash flows at today’s price.
The idea behind growth stocks is that these companies will experience above-average growth in the future. These stocks are relatively more expensive than their value peers, in order to account for the high growth potential.
Value stocks are typically mature companies that don’t have amazing future growth prospects. These stocks are inexpensive relative to growth and have more of a margin of safety in the event of a market crash.
In a market downturn, growth stocks have a lot more room to fall because of their expensive valuation. Since value stocks already trade cheaply, they tend to not fall by quite as much.
High inflation and rising interest rates signal the economy is approaching its peak. With this in mind, now is the perfect time to consider adding value ETFs to your portfolio.
Best Value ETFs in Canada
- Ticker: XCV.TO
- Inception Date: November 6, 2006
- Assets Under Management: $96.1 million
- Management Expense Ratio: 0.55%
- Listed on: Toronto Stock Exchange
- Distribution Yield: 2.67%
- Stock Price: $32.25
- YTD Return: -0.45%
XCV is an average-sized ETF offered by iShares. It passively tracks the Dow Jones Canada Select Value Index.
The ETF’s MER is higher than most passive equity ETFs, especially those offered on US exchanges.
XCV, like the other ETFs on this list, is considered a strategic beta ETF because it focuses on the value factor. Although these types of ETFs come with a higher MER, 0.55% is average for a strategic beta ETF.
XCV is extremely concentrated, with only 34 stock holdings in its portfolio.
2. CI Morningstar Canadian Value ETF
- Ticker: FXM.TO
- Inception Date: February 13, 2012
- Assets under Management: $422.41 million
- Management Expense Ratio: 0.65%
- Listed on: Toronto Stock Exchange
- Distribution Yield: 2.14%
- Stock Price: $19.86
- YTD Return: -0.42%
FXM is a large ETF offered by CI Global Asset Management. It passively tracks the Morningstar Canada Target Value Index.
When looking at similar ETFs, FXM’s MER is fairly high. It is considerably higher than XCV’s.
FXM is also extremely concentrated, with only 36 stock holdings in its portfolio.
3. BMO MSCI Canada Value ETF
- Ticker: ZVC.TO
- Inception Date: October 4, 2017
- Assets under Management: $23.82 million
- Management Expense Ratio: 0.40%
- Listed on: Toronto Stock Exchange
- Distribution Yield: 2.53%
- Stock Price: $25.94
- YTD Return: 0.45%
ZVC is a small ETF offered by BMO Global Asset Management. It passively tracks the MSCI Canada Enhanced Value Capped Index.
When compared to similar ETFs, FXM’s MER is low. It is the most inexpensive Canada value ETF on this list.
ZVC is highly concentrated, with 50 stock holdings. The ETF was created fairly recently, and its performance since inception has relatively underperformed the other funds on this list.
4. Vanguard Global Value Factor ETF
- Ticker: VVL.TO
- Inception Date: June 14, 2016
- Assets under Management: $307.18 million
- Management Expense Ratio: 0.38%
- Listed on: Toronto Stock Exchange
- Distribution Yield: 1.60%
- Stock Price: $45.02
- YTD Return: 0.71%
VVL is a large ETF offered by Vanguard in Canada. It is actively managed to provide an excess return over global stocks by focusing on the value factor.
This ETF is different from the first three on the list because it holds value stocks globally, not just in Canada.
Considering that VVL is actively managed, its MER of 0.38% is very low. If you believe in the value of active management, this is an incredible price point.
VVL is broadly diversified across 1,126 stocks. Since the ETF is allowed to invest globally, the investment universe is much larger than just within Canada.
This ETF is not currency-hedged, meaning that currency fluctuations will impact your returns.
5. Fidelity US Value ETF
- Ticker: FCUV.TO
- Inception Date: June 5, 2020
- Assets under Management: $132.12 million
- Management Expense Ratio: 0.35%
- Listed on: Toronto Stock Exchange
- Distribution Yield: 1.05%
- Stock Price: $15.56
- YTD Return: 2.71%
FCUV is an average-sized ETF offered by Fidelity in Canada. It passively tracks the Fidelity Canada US Value Index.
This ETF focuses exclusively on mid-cap and large-cap value companies in the US.
FCUV is another strategic beta ETF, and its MER is fairly inexpensive. The ETF is decently diversified, with 95 stock holdings.
FCUV was recently launched by Fidelity, so it only has a track record since 2020. Since inception performance has been great, relative to other ETFs on this list.
This ETF is also not currency-hedged, meaning US and Canadian dollar fluctuations will impact your returns.
6. BMO MSCI USA Value ETF
- Ticker: ZVU.TO
- Inception Date: October 4, 2017
- Assets under Management: $108.33 million
- Management Expense Ratio: 0.34%
- Listed on: Toronto Stock Exchange
- Distribution Yield: 2.52%
- Stock Price: $27.57
- YTD Return: 0.55%
ZVU is an average-sized ETF offered by BMO in Canada. It passively tracks the MSCI USA Enhanced Value Capped Index.
ZVU is another US-focused strategic beta ETF, similar to Fidelity’s FCUV. Its MER is lower than FCUV’s and is low for a strategic beta ETF. The ETF is more diversified than FCUV, with 150 US holdings.
Over the same timeframe as FCUV, ZVU has underperformed it significantly. In terms of broader overall performance, ZVU has fairly sub-par returns for a US value ETF.
ZVU is not currency hedged.
7. Fidelity International Value ETF
- Ticker: FCIV.TO
- Inception Date: June 5, 2020
- Assets under Management: $85.1 million
- Management Expense Ratio: 0.52%
- Listed on: Toronto Stock Exchange
- Distribution Yield: 1.79%
- Stock Price: $32.24
- YTD Return: 0.92%
The last ETF on our list, FCIV is a small ETF offered by Fidelity. It passively tracks the Fidelity Canada International Value Index.
FCIV is unique on this list because it is an international ETF. International ETFs seek to invest exclusively outside of North America, so they will typically have little or no stock holdings in Canada and the US.
FCIV is considered a strategic beta ETF, focused on the value factor. Its MER is fairly average considering that it is an international fund. FCIV has 105 holdings.
With the same inception date as its US counterpart FCUV, FCIV has a very short track record. Performance has been very poor relative to the other ETFs on this list, mainly because FCIV invests outside of North America.
FCIV is not currency hedged.
How Different Geographies Affect Value ETF Performance
The geographical mandate of an ETF is an important factor to consider before choosing a value ETF for your portfolio. An ETF that has a specific geographical mandate will have a hard time investing outside of it, if at all.
As an example, a US value ETF will generally not be able to invest in a Canadian value stock. This is the case even if the company managing the ETF does its very best research and determines that the Canadian value stock will greatly improve the returns of the US ETF.
Structural Differences between Markets
Many countries and geographies have sectors that make up a large portion of their economy. In Canada, sectors that are large contributors to the economy include energy, materials, and financials.
The US market is very different from the Canadian market. Large contributors to the US economy are technology and healthcare.
If you are looking to invest in value ETFs, these will likely concentrate your investments across particular sectors.
A large portion of technology companies are growth companies, so it will be rare to find a value fund that has a high allocation to the technology sector.
Be mindful when comparing value ETFs across different geographies. Regions could outperform others simply based on what sectors their economies are focused on.
Which Value ETF is the Best?
If we had to choose one ETF from the list above from a holistic perspective, we could argue that FXM is the best option.
FXM has a fantastic long-term performance track record, and it’s a fairly large ETF. Its MER is high compared to the others on the list, but FXM manages to outperform almost all of the other ETFs over most time periods net of fees.
The fact that FXM invests in Canadian value companies should also help with performance going forward. The Canadian economy’s sector biases should continue to do well in an inflationary environment.
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Conclusion
Given the economic environment that the whole world is currently facing, value companies are in a good position to outperform their growth counterparts.
Before choosing a value ETF for your portfolio, check out its current underlying holdings and where it is invested geographically.
Make sure you also thoroughly understand value as an investment factor and consider some of the best value stocks in Canada as a complement or alternative to value ETFs.
