Exchange-traded Funds 

State Street shrinks value fund constituents

State Street shrinks value fund constituents

State Street Global Advisors has significantly reduced the number of companies tracked by a pair of its value-focused exchange-traded funds.

The Boston-based company said today (12 July) that the number of securities in both the SPDR MSCI USA Value Ucits ETF and the SPDR MSCI Europe Value Ucits ETF had been reduced from more than 1,000 in aggregate to 125 per index.

The change, which saw the ETFs switch benchmarks to track the MSCI USA Value Exposure Select index and the MSCI Europe Value Exposure Select index respectively, took effect yesterday (11 July).

The result will be a higher conviction value exposure, a spokesman for SSGA said.

The indexes do not target any specific sector and seek to avoid too much exposure to one specific stock.

The changes to the benchmark are encouraging, according to Darius McDermott, managing director of Chelsea Financial Services.

Mr McDermott said: "A more high conviction index of 125 stocks is a good thing. A thousand-plus stocks is far too many and really just dilutes the value element."

However, he questioned how SSGA defined value.

Mr McDermott said: "At the moment, I would argue it is not value in the true sense of the word.

"Microsoft is currently a top holding (of the US ETF) when it is on a trailing price-to-earnings of 68. If you look at studies by Graham and Dodd or Farmer and French, which use price to book and, to me, embody value investing in its purest form, Microsoft simply wouldn't make the cut.

"Hopefully these new indices will be more value; as we know it."

According to SSGA, value ETFs today make up the second largest category in the European smart beta or factor ETF market, growing from less than 5 per cent of the market in 2006 to around 18 per cent of the market in 2018.