A few months ago, I wrote about the mechanics of value investing and the many decisions that go into building value portfolios. Many investors believe that all value-based strategies will produce similar performance. But in reality, the many portfolio construction decisions that value managers make, which I highlighted in the article, can lead to major differences both in their performance and in the ability of investors to stick with their strategies.

I wrote my previous article from the perspective of a practitioner developing value strategies, but after writing it, I received several questions about how the framework I discussed in the article can be used for investors on the other side of the equation who are evaluating value strategies. Since I think many of the same principles apply, I wanted to use this article to look at some popular value ETFs and how I might evaluate them using these criteria.

Just to be clear before I start, nothing I will write here should be interpreted as investment advice. My goal is to identify what I might look at when evaluating value ETFs, not to pick the best one. And as you will see when the analysis is done, there is no such thing as the optimal approach to building a value portfolio because a large part of the process of matching an ETF with an investor is a function of that investor’s personal goals and risk tolerance. Also, in the interest of full disclosure, I also want to note that I am the portfolio manager of an ETF that uses a value approach. I will not mention or discuss that product in this article, but I think it is important for anyone who reads my articles to understand any personal interest I have in what I am talking about.

With that out of the way, let’s move on to our framework.

What is Value?

When I talk about value investing, I am talking about a more traditional definition of it. That means buying cheap stocks relative to current fundamentals. That could mean earnings or cash flow or book value or sales or a variety of other metrics. There are some funds out there that use the word “value” in their name, but don’t fit into this traditional value mold. When value struggles for an extended period, this type of thing tends to happen more often. Managers come up with new ways to define value that fit better with what is happening. I have no problem with that, and those types of approaches have certainly worked better than traditional value recently, but I won’t analyze those types of funds here. So if your definition of value involves using discounted cash flow analysis to show that Tesla is a value stock based on what you think it will earn between now and 2032, this article likely isn’t for you.