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Many investors are familiar with value investing, whether through Warren Buffet’s investment philosophy or the traditional
“style-box” grid.

In recent years, Smart Beta ETFs which follow an index that applies a factor lens or screen (like value or growth), have grown more popular as a cost-effective way for investors to seek well-known
investment opportunities.

Value investing is about finding bargains – companies that investors believe are undervalued by the market. Historically, value stocks have outperformed in environments with rising inflation, arguably akin to today’s current market dynamics.

Over the past decade, some investors grew cautious of value investing strategies given the low-growth landscape. However, as the global economy improved, investors became more optimistic about the potential of these strategies.

Traditionally, investors wanting value exposure in their portfolio have employed a financial advisor to help identify value stocks or purchased shares of a mutual fund employing a value investment philosophy. Today, Smart Beta ETFs are providing investors with a new way to gain exposure to value opportunities.

What makes an index focused on the value factor different from a traditional value index is how they select and weigh their component securities. Traditional value indices are market-capitalization weighted – meaning the larger the company, the more of the index it makes up. A factor index, on the other hand, weighs their underlying stocks based on their relative contribution to the factor component, such as value—that is, a company with a higher score for value will make up a larger part of the index.

The determination of value is based on a number of financial health indicators, such as price-to-book, forward-looking price-to-earnings, and enterprise value-to-cash flow from operating activities. In effect, the more undervalued a company appears to be based on these indicators, the more of the index it will take up. This means that these factor value indexes tend to be more strongly ‘tilted’ towards value than traditional market-cap based indexes.

Factor indexes and thus Smart Beta ETFs are typically re-balanced each year, which means that screens are re-applied to check that companies in the index continue to display the relevant factor characteristics e.g. value. Factors are not new in the investing world. They are well known, well documented, well understood investment characteristics. What is new is the ability to access these investment ideas, such as the value factor, through Smart Beta funds like ETFs.

Smart Beta ETFs capture the power of factors, like value, and deliver them in a cost and tax-efficient structure, revolutionizing the way investors access investment ideas.