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Jeremy Grantham’s GMO Expands ETF Franchise With New Value-Trade Offerings

(Bloomberg)

(Bloomberg) -- Grantham Mayo Van Otterloo is expanding its footprint in the $10 trillion ETF marketplace by going back to its roots.

The Boston-based money manager — which has become known for a valuation-driven investment process since its establishment in 1977 — is debuting the GMO US Value ETF (ticker GMOV) and GMO International Value ETF (GMOI) on Tuesday. The offerings have expense ratios of 0.5% and 0.6%, respectively.

The new entries will mirror two existing mutual funds from GMO: the roughly $561 million GMO US Opportunistic Value Fund and the $429 million GMO International Opportunistic Value Fund. The launch comes as the value approach is underperforming growth shares for a second straight year, but by a diminishing margin in part fueled by expectations that Federal Reserve interest-rate cuts will boost companies with weaker balance sheets costs.

The strategy of scooping up stocks that look cheap has delivered double-digit returns this year. Yet it’s been overshadowed by the boom in tech-driven growth investing thanks to the Magnificent Seven stocks. While excitement over artificial intelligence has reached fever pitch, there’s good news for value proponents: The resilient US economy has also spurred gains across once-unloved pockets of the equity market of late.

“Obviously, the Mag 7 over the past few years is a big reason for the relative performance gap,” said George Cipolloni, a portfolio manager at Penn Mutual Asset Management. “The value-versus-growth trend is highly dependent upon the level of interest rates now and moving forward.”

Appetite for momentum bets will be tested this week as the tech megacaps kick off earnings announcements. Mag-7 member Alphabet Inc. is due to report Tuesday, followed by Microsoft Corp., Meta Platforms Inc., Apple Inc. and Amazon.com Inc. later in the week.

The value sector’s underperformance isn’t deterring GMO, which says so-called deep value stocks are one of its highest-conviction asset allocations. The approach is to target the stocks that GMO assesses are the cheapest 20% relative to their worth, regardless of how the firms are categorized by index providers.

Ben Inker, co-head of asset allocation at GMO, says value stocks have never been cheaper in developed non-US markets, going back to the 1980s. 

“The problem is if you wait to launch until something has already been having a great run, you’ll have missed out,” he said in an interview. “We’re thrilled to be able to launch these strategies” even if “I don’t think the entire world is clamoring to buy value stocks because they’re clamoring to buy Nvidia.”

Other ETFs tracking value already exist. Two of the biggest are the $129 billion Vanguard Value ETF (VTV) and the $100 billion iShares Russell 1000 Growth ETF (IWF) — both passively managed. What sets GMO’s versions apart, says Inker, is their active management.

Fed Trajectory

With the Fed expected to lower rates again before year-end and in 2025, some traders are betting on a rotation out of tech stocks in favor of sectors like real estate. 

“Over the long-term, value is better-positioned to outperform given its much lower valuations,” said Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors LLC. “Investors have left the category for dead. From a cyclical perspective, the acceleration and broadening out of earnings growth should be positive for value stocks.”

GMO introduced its first ETF — the GMO US Quality ETF (QLTY) — in November 2023, and it has grown to $1.2 billion. The fund focuses on high-quality companies within the US with consistent earnings, robust balance sheets and strong cash flow generation. The firm is debuting the GMO International Quality (QLTI) on Tuesday as well, focusing on international equities. It will have an expense ratio of 0.60%. 

GMO has also filed for two other ETFs: GMO Beyond China (BCHI) and GMO Systematic Investment Grade Credit (INVG). If approved by the US Securities and Exchange Commission, they would expand the firm’s ETF lineup to six offerings. 

GMO, co-founded by Jeremy Grantham, managed around $70 billion as of Sept. 30.

--With assistance from Denitsa Tsekova.

©2024 Bloomberg L.P.