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Introducing VLUE: a Smart Beta Fund Based on an Underlying Index

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VLUE valuation factors

The iShares MSCI USA Value Factor ETF (VLUE) is a smart beta fund managed by iShares that seeks to mimic the performance of the MSCI USA Enhanced Value Index (the underlying index), which is based on its traditional, market capitalization-weighted parent index, the MSCI USA Index.

An underlying index—in this case, the MSCI USA Enhanced Value Index—assigns a value score to each stock in the whole of the parent portfolio—in this case, the MSCI USA Index—on the basis of three parameters:

  1. PB (price-to-book) ratio
  2. PE (price-to-earnings) ratio
  3. PC (price-to-cashflow) ratio

The index then selects stocks based on these value scores, with the highest-scoring stock getting the highest weight, and so forth. Currently, the MSCI USA Enhanced Value Index has 149 stocks in its portfolio.

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Top holdings

VLUE invests more than 80% of its net assets in the components of its underlying index. The index components primarily include IT (information technology), financial, and healthcare companies, as the above graph shows. VLUE’s top five holdings are Pfizer (PFE), Intel Corporation (INTC), Cisco Systems (CSCO), JPMorgan Chase (JPM), and General Motors Company (GM). These top five holdings of VLUE make up 18.4% of the total portfolio of VLUE.

Strategy insight

By selecting companies according to a combination of their PB, PE, and PC ratios, VLUE aims to include stocks with strong fundamental valuations in its portfolio. Valuation multiples help identify the true value of a company’s stock, using figures that can estimate the stocks’ future gains or losses.  The current PB, PE, and PC ratios of VLUE’s total portfolio are 1.63, 17.47, and 7.09, respectively.

Read on to the next part of this series, wherein we’ll discuss VLUE’s holding performances in greater detail.

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