The strategy invests in 42 country ETFs using 120 anomalies across nine categories. Portfolios are constructed based on ranking ETFs by anomaly-related variables, and long-short zero-investment portfolios are rebalanced monthly.
ASSET CLASS: ETFs | REGION: Global | FREQUENCY:
Monthly | MARKET: equities | KEYWORD: Asset Allocation
I. STRATEGY IN A NUTSHELL
The investment universe comprises 42 country exchange-traded funds (ETFs). The paper constructs 120 international equity strategies across nine anomaly categories: value versus growth, momentum, quality, investment, liquidity, skewness, extreme risk, low-risk, reversal, and seasonality. For each strategy, ETFs are sorted based on relevant anomaly variables and ranked into quartiles. Long-short zero-investment portfolios are formed by taking long positions in the top quartile (higher expected returns) and short positions in the bottom quartile (lower expected returns). The value spread, defined as the difference in EBITDA-to-enterprise value (EBEV) ratios between the long and short portfolios, is used to identify the 12 most attractive strategies. These selected strategies are equally weighted and rebalanced monthly.
II. ECONOMIC RATIONALE
The strategy’s foundation lies in the predictive power of valuation ratios. A larger value spread indicates that the long portfolio is significantly undervalued relative to the short portfolio, implying stronger expected future performance. This spread serves as a forward-looking signal of return potential—the wider the spread, the higher the anticipated return differential. Conversely, a narrow spread suggests limited opportunity. By using ETFs, the strategy ensures liquidity, transparency, and practical implementability. Ultimately, the value spread acts as a dynamic gauge of relative market mispricing, enabling investors to capture systematic return opportunities across global equity markets.
III. SOURCE PAPER
Strategies Can Be Expensive Too! The Value Spread and Asset Allocation in Global Equity Markets [Click to Open PDF]
Adam Zaremba, Montpellier Business School, Poznan University of Economics and Business, University of Cape Town (UCT); Mehmet Umutlu, Edinburgh Napier University – The Business School, Accounting and Finance Subject Group
<Abstract>
Is the value spread useful for forecasting returns on quantitative equity strategies for country selection? To test this, we examine a sample of 120 country-level equity strategies replicated within 72 stock markets for the years 1996-2017. The value spread is a powerful and robust predictor of strategy returns in the cross-section, subsuming other methods based on momentum, reversal, or seasonality. Going long (short) the strategies with the broadest (narrowest) value spread produces significant four-factor model alphas, markedly outperforming an equal-weighted benchmark of all of the strategies. The results are robust to many considerations.
IV. BACKTEST PERFORMANCE
| Annualised Return | 5.91% |
| Volatility | 6.37% |
| Beta | N/A |
| Sharpe Ratio | 0.93 |
| Sortino Ratio | N/A |
| Maximum Drawdown | N/A |
| Win Rate | N/A |
