VLUE ETF Might Have The Wrong Tech Exposures (BATS:VLUE)


processor chip, tech environment, blockchain concept

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Published on the Value Lab 3/8/22

The iShares Edge MSCI USA Value Factor ETF (BATS:VLUE) is supposed to be a US value stock tracker. Value stocks and low multiple stocks are not the same thing, so we’re not very convinced from the outset. Moreover, looking at the exposures, we feel some latent effects from the tech industry might kick in and limit the upside here. We’d pass on VLUE for now.

VLUE Breakdown

VLUE has a considerable weighting in IT stocks.

vlue breakdown

VLUE Breakdown (iShares.com)

When you start looking into it, you realise that a lot of the exposure, but not all, is still going strong in step with the last quarter’s earnings season from tech companies. Some notable failures include Intel (INTC) which is the largest tech exposure and is seeing fundamental headwinds and a revenue outlook guided for a 15% decline. That’s when the stock took its latest dip.

Concerns About Tech

While Intel was the most notable troubled child within tech, there were a lot of enterprise-exposed companies that were still going very strong. In fact, we are seeing a very worrying bifurcation between consumer-facing and enterprise-facing tech. In consumer-facing tech companies, we are seeing quite sharp declines in spending connected with falling consumer confidence. Credit to Todd Combs, Apple (AAPL) appears to produce necessities and was able to weather the storm. In general, however, within tech, we are seeing a fall in the consumer discretionary kind.

Meanwhile, in enterprise-facing technology, we are not seeing those declines. In fact, across enterprise-facing hardware and tech companies, we are seeing continued corporate confidence. This is still a good sign because it means that like with their investment cycles, they might also be looking to the future with their recruiting, which means we may not have a worrying amount of unemployment spiraling yet. However, the possibility of falling corporate confidence as well, at which point we are in a clear recession, is likely to follow falling consumer confidence. Much like inflation took a while to pass through industry and into consumer prices, confidence should follow a similar waterfall in the other direction.

Conclusions

That’s where we have our concerns about the VLUE ETF. We’re back at the late 2021 levels, which was a forgiving market. There is still room to fall, and the markets might not be aware of the potential trap that a possible apex in corporate confidence might bring. By being a value ETF, it is weighted more to the backend names like IBM (IBM) and others that have yet to feel the brunt of oncoming effects. We have moved out of corporate tech holdings as of now.

While we don’t often do macroeconomic opinions, we do occasionally on our marketplace service here on Seeking Alpha, The Value Lab. We focus on long-only value ideas, where we try to find international mispriced equities and target a portfolio yield of about 4%. We’ve done really well for ourselves over the last 5 years, but it took getting our hands dirty in international markets. If you are a value-investor, serious about protecting your wealth, us at the Value Lab might be of inspiration. Give our no-strings-attached free trial a try to see if it’s for you.



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