Beginner Investors: How to Invest in Global Value Stocks With ETFs

exchange traded funds

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Value investors try to find companies that are trading at stock prices that are lower than their fundamentals. Your goal is to buy undervalued stocks before Mr. Market wakes up and rates them higher. If this succeeds, value investors can make decent profits.

Some of the greatest investors in history have been value investors like Warren Buffett. If you’re interested in emulating Buffett and picking some potentially undervalued stocks, you can find some excellent Canadian value stocks from the other Foolish contributors.

However, I am a passive investor and only invest with exchange traded funds or ETFs. Beginners can use a value ETF as the core of their portfolio to provide instant diversification and add custom stock picks later. Today, let’s go through my favorite globally diversified value ETF.

How does a global value ETF work?

An ETF is a fund that can hold a basket of stocks and trade on an exchange. When investors buy a stock in an ETF, they get access to all of the underlying assets.

A value ETF is simply a fund that holds a portfolio of value stocks according to a preset rule (if passive) or manager discretion (if active).

In any case, the point of a value ETF is to provide exposure to stocks with value characteristics. Value ETFs often look for metrics like low price-to-book, price-to-sales ratio, or price-to-earnings ratio.

The good ones also include profitability and earnings screening to weed out companies that are undervalued because they are actually performing poorly (“value traps”).

Value ETFs can cover value stocks from all markets, not just the TSX. Investors can diversify their portfolios and invest in Canadian, US, internationally developed and international emerging stocks.

My global value ETF picks

I am a fan of Vanguard Global Value Factor ETF (TSX:VVL). This fund uses a quantitative, rules-based model to select stocks that are underpriced relative to their fundamental measures of value, which include price-to-book and price-to-earnings ratios, estimated future earnings and operating cash flow.

VVL is highly diversified, holding 983 large, mid and small cap stocks from North America (70.7%), Europe (16.9%), the Pacific (11.7%) and the Middle East (0. 7%). Essentially, it covers most of the investable stock market in the world. The largest represented sector is the financial sector (24.2%).

Compared to similar Vanguard All Equity ETF (TSX:VEQT), VVL looks undervalued. VVL has lower price-to-earnings and price-to-book ratios of 7.0 and 1.0, respectively, compared to VEQT’s 12.1 and 1.7. This means that VVL shares are trading at cheaper valuations on average.

In terms of fees, VVL costs a 0.38% management expense ratio (MER). This is the annual percentage fee that will be deducted from your total investment over time. For a $10,000 investment, an MER of 0.38% translates to about $38 in annual fees, making VVL cheap compared to most mutual funds.

The stupid snack

VVL could be a great way to hold a portfolio of global value stocks without the hassle. Using VVL as the “core” of a value portfolio is a great way to achieve maximum diversification. However, remember that value investing is a long-term endeavor. There have been times when growth stocks have significantly outperformed value. Staying the course and not chasing performance is the key to success.

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