Recently Nasdaq’s website published an article which asked whether VUSE “is a strong ETF right now” (“Is Vident Core U.S. Equity ETF (VUSE) a Strong ETF Right Now?,” 12-14-21, Nasdaq.com). Using research from Zacks Equity Research, the article outlined ways in which VUSE differs from the pack when it comes to investment philosophy.
First, they look at the dominant approach:
“For a long time now, the ETF industry has been flooded with products based on market capitalization weighted indexes, which are designed to represent the broader market or a particular market segment.”
(Source: “Is Vident Core U.S. Equity ETF (VUSE) a Strong ETF Right Now?,” 12-14-21, Nasdaq.com)
They point out that the dominant approach, which simply attempts to mirror the market as it is, depends on a particular set of beliefs about how markets work:The market efficiency approach holds that…
“Investors who believe in market efficiency should consider market cap indexes, as they replicate market returns in a low-cost, convenient, and transparent way.”
(Source: “Is Vident Core U.S. Equity ETF (VUSE) a Strong ETF Right Now?,” 12-14-21, Nasdaq.com)
The market efficiency approach holds that…
“A truly efficient market eliminates the possibility of beating the market, because any information available to any trader is already incorporated into the market price.”
(Source: “Market Efficiency,” Investopedia.com)
The hypothesis is hardly a slam dunk:
“Whether or not markets such as the U.S. stock market are efficient, or to what degree, is a heated topic of debate among academics and practitioners.”
(Source: “Market Efficiency,” Investopedia.com)
In fact, though efficient market thinking has been validated by a number of Nobel Prizes, those reflect a hypothesis which was in fashion in academia decades ago, and recent research and Nobel Prizes have been tending towards theories such as behavioral finance which see markets as less than fully rational.
One weakness which many investors see in efficient market theory is that it forces the fund to ignore important factors such as valuation:
“For example, at the other end of the spectrum…are the value investors, who believe stocks can become undervalued, or priced below what they are worth. Successful value investors make their money by purchasing stocks when they are undervalued and selling them when their price rises to meet or exceed their intrinsic worth.”
(Source: “Market Efficiency,” Investopedia.com)
Value investors believe that stocks can become undervalued or overvalued, that bubbles actually exist, and that high valuations can signal their existence.
The Nasdaq article points to “smart beta” as an alternative to market cap:
“But, there are some investors who would rather invest in smart beta funds; these funds track non-cap weighted strategies, and are a strong option for those who prefer choosing great stocks in order to beat the market.”
(Source: “Is Vident Core U.S. Equity ETF (VUSE) a Strong ETF Right Now?,” 12-14-21, Nasdaq.com)
Such an approach can use single valuation factors or a more sophisticated approach which looks at a combination of such factors:
“Based on specific fundamental characteristics, or a combination of such, these indexes attempt to pick stocks that have a better chance of risk-return performance.”
(Source: “Is Vident Core U.S. Equity ETF (VUSE) a Strong ETF Right Now?,” 12-14-21, Nasdaq.com)
The article points out that VUSE is of considerable size:
“VUSE is managed by Vident Financial, and this fund has amassed over $452.73 million, which makes it one of the larger ETFs in the Style Box – All Cap Value.” [Author note: VUSE is managed by Vident Advisory, LLC and sub-advised by Vident Assessment Management, LLC; both wholly-owned subsidiaries of Vident Financial, LLC.]
(Source: “Is Vident Core U.S. Equity ETF (VUSE) a Strong ETF Right Now?,” 12-14-21, Nasdaq.com)
Note, also above, that it is an “All Cap” style fund. This means the portfolio is not locked into a particular size company, as various cap-weighted style box funds are. If large cap funds become less attractively valued, a large cap fund is forced to stay in large cap. All Cap funds can go where the most attractive options are. All Cap funds can be misunderstood and treated as small and mid cap funds (SMIDs), simply because in popular press coverage, very large companies get a lot of attention as do the indices which hold them such as the Dow Jones Industrial Average of the Standard & Poors 500. The focus is so strong that portfolios which broaden out their universe to include non-large cap companies can often appear by contrast to be SMIDS. But SMIDS, like large caps, are locked into a universe limited by size, the difference being which size bucket they are limited to.
The article also points out that the index VUSE seeks to track goes beyond just traditional “fundamental”, i.e., value, factors to include other factors such as strong corporate governance and forensic accounting screens designed to spot companies at greater risk of misreporting earnings:
“The Vident Core U.S. Equity Fund Index represents a portfolio of US companies that adhere to higher standards of corporate governance and accounting, as measured by numerous research metrics.”
(Source: “Is Vident Core U.S. Equity ETF (VUSE) a Strong ETF Right Now?,” 12-14-21, Nasdaq.com)
This makes fundamental investing more sophisticated in that value investing compares some form of price to some form of earnings: for example, price/earnings ratios (or PE ratios). By doing this, it takes the E, the earnings, for granted. Forensic accounting and optimizing for good corporate governance helps to counter distortions to valuation metrics by flagging companies which have reported earnings which are at more risk of being distorted.
The smart beta rules are part of the research and evaluation process, which does add fees in comparison with market cap weighted passive funds, which simply mirror a readily available list of companies. But as Nasdaq points out, when compared with other smart beta funds, VUSE’s fees are reasonable:
“Operating expenses on an annual basis are 0.48% for this ETF, which makes it on par with most peer products in the space.” [Author note: As of January 1, 2022, VUSE total annual operating expenses are 0.50%.]
(Source: “Is Vident Core U.S. Equity ETF (VUSE) a Strong ETF Right Now?,” 12-14-21, Nasdaq.com)
In addition, these rules create a well-diversified fund in terms of low concentration in the top 10:
“Its top 10 holdings account for approximately 6.68% of VUSE’s total assets under management.”
(Source: “Is Vident Core U.S. Equity ETF (VUSE) a Strong ETF Right Now?,” 12-14-21, Nasdaq.com)
And a large number of holdings:
“With about 227 holdings, it effectively diversifies company-specific risk.”
(Source: “Is Vident Core U.S. Equity ETF (VUSE) a Strong ETF Right Now?,” 12-14-21, Nasdaq.com)
The performance returns, holdings information, and net asset value of VUSE reported in the December 14, 2021, Nasdaq article are as of a former period in time, and Vident Financial and its subsidiaries do not guarantee their accuracy. For current information, please visit www.videntfunds.com/funds/vuse.
Carefully consider the Fund’s investment objectives, risk factors, charges, and expenses before investing. To obtain a prospectus visit www.videntfunds.com/literature or call 800-617-0004. Please read it carefully before investing.
Investing involves risk, including the risk of loss of principal. VUSE has the same risks as the underlying securities traded on the exchange throughout the day at market price. Redemptions are limited and often commissions are charged on each trade. The Fund invests primarily in securities of large cap companies. As a result, the Fund’s performance may be adversely affected if the securities of large cap companies underperform. The Fund may also invest in small and medium-capitalization companies. Small and medium-capitalization companies tend to have more limited liquidity and greater price volatility than large-capitalization companies. The Fund invests in the securities included in, or representative of its Index regardless of their investment merits. The performance of the Fund may diverge from the Index. The Fund is not actively managed, and its performance may be adversely affected by a general decline in the market segments relating to its Index. The Fund may invest a significant portion of its assets in the securities of companies of a particular sector of the economy therefore its performance will be especially sensitive to developments that significantly affect those sectors.
VUSE’s investment adviser is Vident Advisory, LLC. VUSE’s sub-adviser is Vident Assessment Management (VIA). Vident Financial owns the index that underlies VUSE. The Vident Core U.S. Equity Fund is distributed by ALPS Distributors, Inc. ALPS is not affiliated with Vident Financial, Vident Advisory or VIA.
Diversification does not ensure a profit or protect against a loss.
The opinions expressed herein are those of Vident Financial at the time of publication and are subject to change. This document does not constitute advice or a recommendation or offer to sell or a solicitation to deal in any security or financial product. It is provided for information purposes only and on the understanding that the recipient has sufficient knowledge and experience to be able to understand and make their own evaluation of the information described herein, any risks associated therewith and any related legal, tax, accounting or other material considerations. Recipients should not rely on this material in making any future investment decision.
Investors cannot invest directly in an index. Indexes are not managed and do not reflect management fees and transaction costs that are associated with some investments. Past performance does not guarantee future results.
