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Looking for Value in All the Right Places

Alfred Lee

Looking for Value in All the Right Places

  • During the first quarter of 2021, continued optimism for an economic reopening led by the continued vaccination roll-out led to a surge in equity prices. Given the forward-looking nature of asset prices, earnings per share (EPS) for many companies weren’t given the opportunity to follow suit, as the global economy remained largely in lock down due to COVID-19. As such, the current valuations of broad equity market indices became fully valued, with forward-looking EPS dependent on the logistics of vaccine distribution and the ability for the economy to finally reopen.


Index P/E Ratio (Current) P/E Ratio (LT Average) Premium (%)
S&P/TSX Composite Index 23.105 19.19 20.40%
S&P 500 Composite Index 29.825 18.69 59.58%
Dow Jones Industrial Average 26.126 17.05 53.23%
Nasdaq 100 Index 36.085 23.27 55.07%

Source: Bloomberg, LT Average (15-year average). For Illustrative purposes only. Past performance is not indicative of future results.


  • While the inoculation rates look more promising every day, there are risks that remain on the horizon. Any unforeseen risk that may prevent companies in meeting forward-looking earnings estimates could potentially cause equity prices to turnover. As a result, many investors have been rotating into stocks trading at a lower valuation, not only for more upside potential, but also for better downside protection, as value stocks do not have the same degree of perfection priced in.
  • Historically, value stocks have tended to outperform the broader market during the early phase of an economic recovery. During a market trough, they are generally out of favour due to the specifics of the recession, which is thus reflected in the stock price. As economic conditions improve, they typically experience the largest repricing effects as uncertainty is lifted. This economic recovery has proven to be no different: since November 6, when the Pfizer vaccine broke headlines, the outperformance of value stocks in Canada and the U.S. relative to the broad market has accelerated.1


Source: Bloomberg, BMO Global Asset Management (Total Returns from November 6, 2020 to May 28, 2021). Annualized performance to April 30, 2021 net of fees: ZCN 1 year: 33.3%; 3 years: 10.4%; 5 years: 9.8%; 10 years: 6.2%; Since Inception: 7.7%; ZVC 1 year: 42.2%; 3 years: 4.9%; Since Inception: 5.5%; ZSP 1 year: 28.4%; 3 years: 16.5%; 5 years: 16.5%; Since Inception: 18.8%; ZVU 1 year: 33.8%; 3 years: 8.9%; Since Inception: 10.0%. Past Performance is not indicative of future results.


Why the value rotation may continue:

  1. As mentioned, broad market indices need at least one quarter for company earnings to catch up and justify their lofty share prices, with many indices hitting all-time highs. Investors looking for better valuations may potentially rotate into value stocks and fixed income to a certain degree, which is also looking attractive given the recent rise in yields. As such, investors have some alternatives they can allocate to in their portfolios over the near-term, rather than broad market indices.
  2. As outlined in our Second Quarter Fixed Income Report, while we anticipate yields to remain relatively flat in Q2, rates may face further upward pressure in the second half of the year. In addition to an economic recovery, inflationary pressures and an eventual signal from the U.S. Federal Reserve (Fed) could cause bond yields to continue their rise. Compared to growth equities, value stocks tend to perform better in a rising rate environment. Growth stocks, which tend to carry more leverage since they are typically earlier stage, may face higher financing costs with increased rates. Growth companies also tend to have longer duration cash flows, which become more uncertain as rates rise. An ETF that focuses on the value factor could potentially avoid the growth-oriented stocks in the broader index.
  3. Despite the recent outperformance of value stocks in both Canada and the U.S., valuations from a price-to-book (P/B) ratio perspective still look compelling. Financials and energy companies, which constitute the majority of the BMO MSCI Canada Value Index ETF (ZVC), not only benefit from a steeper yield curve but also remain attractively valued compared to the broader market. The BMO MSCI USA Value Index ETF (ZVU) has a current PB ratio of 3.9x, compared to 4.5x for the S&P 500 Composite Index.

In addition, the constituents of the BMO MSCI Canada Value Index ETF (ZVC) and the BMO MSCI USA Value Index ETF (ZVU) are quality companies – not late-stage businesses on the decline. Many of the holdings are ideal core positions in an equity portfolio. Investors looking to efficiently rotate into value stocks in Canada and U.S. may want to consider allocating to these ETFs .


Top 10 Holdings - BMO MSCI Canada Value Index ETF (ZVC)

Weight (%) Name Ticker
7.34 CANADA NATIONAL RAILWAY CO CNR
5.82 MANULIFE FINANCIAL CORP MFC
5.56 TORONTO-DOMINION BANK/THE TD
5.43 BANK OF NOVA SCOTIA/THE BNS
5.28 CGI INC GIB/A
5.13 ROYAL BANK OF CANADA RY
5.03 CANADIAN NATURAL RESOURCES LTD CNQ
4.51 BANK OF MONTREAL BMO
4.3 OPEN TEXT CORP OTEX
4.06 SUNCOR ENERGY INC SU
3.63 CANADIAN IMPERIAL BANK OF COMMERCE CM
3.07 MAGNA INTERNATIONAL INC MG
2.79 TECK RESOURCES LTD TECK/B

Top 10 Holdings - BMO MSCI USA Value Index ETF (ZVU)

Weight (%) Name Ticker
7.24 AT&T INC T
6.32 INTEL CORP INTC
3.3 MICRON TECHNOLOGY INC MU
3.22 GENERAL MOTORS CO GM
2.82 CISCO SYSTEMS INC/DELAWARE CSCO
2.72 INTERNATIONAL BUSINESS MACHINES CORP IBM
2.61 CITIGROUP INC C
2.25 FORD MOTOR CO F
2 TARGET CORP TGT
1.9 PFIZER INC PFE
1.86 ABBVIE INC ABBV
1.75 CVS HEALTH CORP CVS
1.73 RAYTHEON TECHNOLOGIES CORP RTX

Source: BMO Global Asset Management as of May 28, 2021 – ZVC total holdings 50, ZVU total holdings: 150.





1 CNBC.

Alfred Lee

Looking for Value in All the Right Places

  • During the first quarter of 2021, continued optimism for an economic reopening led by the continued vaccination roll-out led to a surge in equity prices. Given the forward-looking nature of asset prices, earnings per share (EPS) for many companies weren’t given the opportunity to follow suit, as the global economy remained largely in lock down due to COVID-19. As such, the current valuations of broad equity market indices became fully valued, with forward-looking EPS dependent on the logistics of vaccine distribution and the ability for the economy to finally reopen.


Index P/E Ratio (Current) P/E Ratio (LT Average) Premium (%)
S&P/TSX Composite Index 23.105 19.19 20.40%
S&P 500 Composite Index 29.825 18.69 59.58%
Dow Jones Industrial Average 26.126 17.05 53.23%
Nasdaq 100 Index 36.085 23.27 55.07%

Source: Bloomberg, LT Average (15-year average). For Illustrative purposes only. Past performance is not indicative of future results.


  • While the inoculation rates look more promising every day, there are risks that remain on the horizon. Any unforeseen risk that may prevent companies in meeting forward-looking earnings estimates could potentially cause equity prices to turnover. As a result, many investors have been rotating into stocks trading at a lower valuation, not only for more upside potential, but also for better downside protection, as value stocks do not have the same degree of perfection priced in.
  • Historically, value stocks have tended to outperform the broader market during the early phase of an economic recovery. During a market trough, they are generally out of favour due to the specifics of the recession, which is thus reflected in the stock price. As economic conditions improve, they typically experience the largest repricing effects as uncertainty is lifted. This economic recovery has proven to be no different: since November 6, when the Pfizer vaccine broke headlines, the outperformance of value stocks in Canada and the U.S. relative to the broad market has accelerated.1


Source: Bloomberg, BMO Global Asset Management (Total Returns from November 6, 2020 to May 28, 2021). Annualized performance to April 30, 2021 net of fees: ZCN 1 year: 33.3%; 3 years: 10.4%; 5 years: 9.8%; 10 years: 6.2%; Since Inception: 7.7%; ZVC 1 year: 42.2%; 3 years: 4.9%; Since Inception: 5.5%; ZSP 1 year: 28.4%; 3 years: 16.5%; 5 years: 16.5%; Since Inception: 18.8%; ZVU 1 year: 33.8%; 3 years: 8.9%; Since Inception: 10.0%. Past Performance is not indicative of future results.


Why the value rotation may continue:

  1. As mentioned, broad market indices need at least one quarter for company earnings to catch up and justify their lofty share prices, with many indices hitting all-time highs. Investors looking for better valuations may potentially rotate into value stocks and fixed income to a certain degree, which is also looking attractive given the recent rise in yields. As such, investors have some alternatives they can allocate to in their portfolios over the near-term, rather than broad market indices.
  2. As outlined in our Second Quarter Fixed Income Report, while we anticipate yields to remain relatively flat in Q2, rates may face further upward pressure in the second half of the year. In addition to an economic recovery, inflationary pressures and an eventual signal from the U.S. Federal Reserve (Fed) could cause bond yields to continue their rise. Compared to growth equities, value stocks tend to perform better in a rising rate environment. Growth stocks, which tend to carry more leverage since they are typically earlier stage, may face higher financing costs with increased rates. Growth companies also tend to have longer duration cash flows, which become more uncertain as rates rise. An ETF that focuses on the value factor could potentially avoid the growth-oriented stocks in the broader index.
  3. Despite the recent outperformance of value stocks in both Canada and the U.S., valuations from a price-to-book (P/B) ratio perspective still look compelling. Financials and energy companies, which constitute the majority of the BMO MSCI Canada Value Index ETF (ZVC), not only benefit from a steeper yield curve but also remain attractively valued compared to the broader market. The BMO MSCI USA Value Index ETF (ZVU) has a current PB ratio of 3.9x, compared to 4.5x for the S&P 500 Composite Index.

In addition, the constituents of the BMO MSCI Canada Value Index ETF (ZVC) and the BMO MSCI USA Value Index ETF (ZVU) are quality companies – not late-stage businesses on the decline. Many of the holdings are ideal core positions in an equity portfolio. Investors looking to efficiently rotate into value stocks in Canada and U.S. may want to consider allocating to these ETFs .


Top 10 Holdings - BMO MSCI Canada Value Index ETF (ZVC)

Weight (%) Name Ticker
7.34 CANADA NATIONAL RAILWAY CO CNR
5.82 MANULIFE FINANCIAL CORP MFC
5.56 TORONTO-DOMINION BANK/THE TD
5.43 BANK OF NOVA SCOTIA/THE BNS
5.28 CGI INC GIB/A
5.13 ROYAL BANK OF CANADA RY
5.03 CANADIAN NATURAL RESOURCES LTD CNQ
4.51 BANK OF MONTREAL BMO
4.3 OPEN TEXT CORP OTEX
4.06 SUNCOR ENERGY INC SU
3.63 CANADIAN IMPERIAL BANK OF COMMERCE CM
3.07 MAGNA INTERNATIONAL INC MG
2.79 TECK RESOURCES LTD TECK/B

Top 10 Holdings - BMO MSCI USA Value Index ETF (ZVU)

Weight (%) Name Ticker
7.24 AT&T INC T
6.32 INTEL CORP INTC
3.3 MICRON TECHNOLOGY INC MU
3.22 GENERAL MOTORS CO GM
2.82 CISCO SYSTEMS INC/DELAWARE CSCO
2.72 INTERNATIONAL BUSINESS MACHINES CORP IBM
2.61 CITIGROUP INC C
2.25 FORD MOTOR CO F
2 TARGET CORP TGT
1.9 PFIZER INC PFE
1.86 ABBVIE INC ABBV
1.75 CVS HEALTH CORP CVS
1.73 RAYTHEON TECHNOLOGIES CORP RTX

Source: BMO Global Asset Management as of May 28, 2021 – ZVC total holdings 50, ZVU total holdings: 150.





1 CNBC.

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