The Value Spread and Asset Allocation in Global Equity Markets
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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.
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.