When the evidence is overwhelming, but still not enough

It’s a topic we’ve written about before. Our ability to seek out information that confirms what we already believe, and discount the rest, was the subject of a 2021 Vector Insights.

In that piece, we used the Fama French Five Factor Model to show how big data could help investors uncover the facts about smart beta and active management.

The lesson was simple: the numbers don't lie, but we are very good at not listening to them. Smart beta ETFs, according to the data then presented, can potentially replace active managers that underperform.

Four years on, we find ourselves considering the same theme. Not because people don’t think active managers underperform, rather factor leadership can change and can persist. Once again, the numbers are hard to ignore.

The numbers

Our VanEck International Value ETF (VLUE) has delivered what can only be described as a remarkable run. You can click here to view its performance – click here.

When you consider this performance against its global equity peer group, the results are outstanding.

Table 1: VLUE’s performance against its global equity peer group

VLUE Inception is 8 March 2021
Source: Morningstar, as at 31 July 2026, run on 10 August 2026. Past performance is not indicative of future performance. The benchmark is MSCI World ex Australia Index. The peer group of Global Equities includes Morningstar’s Open Ended Global Equity Blend Category, Morningstar’s Open Ended Global Equity Growth Category and Morningstar’s Open Ended Global Equity Value Category, which are based on the defined Australian universe of funds that invest primarily in large global companies. Results are calculated to the last business day of the month and assume immediate reinvestment of dividends. ETF results are net of management fees and costs, but before brokerage fees or bid/ask spreads incurred when investors buy/sell on the ASX.

According to the Morningstar data presented in table 1, against a peer group of around 500 large company global equity funds, VLUE ranked 1st over one year. Over three years, it sits 4th out of 425. It is top 10 over five years and since its inception. This simple, transparent, smart beta ETF outperformed many international equity active fund managers.

And yet, anecdotally at least, many investors still hesitate. Unlike, in 2021, when we argued for smart beta, this time we think too many investors may have been wary of the value factor.

This is understandable. When we launched VLUE in 2021, Morningstar, Forbes and the Business Times were all running variants of the headline: Is value investing dead? during the preceding 12 months. Value’s death was premised on its decade plus years of persistent underperformance.

But value is the oldest and most empirically grounded of investment factors. It was documented by Graham and Dodd in 1934, in their book Security Analysis. Graham and Dodd developed value investing, a methodology to identify and buy securities priced well below their intrinsic value. Behind this concept of value investing is the belief that “cheaply” valued assets tend to outperform more expensive stocks over a long horizon. Low price-to-book was a key characteristic for value investors.

The decade and a half that followed the GFC were unkind to any investor relying on a price-to-book filter. As many central banks sent interest rates to zero and held them there, the discount rate (a method used to value a company) applied to far-future cash flows collapsed. Growth companies, such as the Magnificent Seven before they had a collective name, drove the market’s returns. Growth, momentum and quality companies had a strong run during this time.

Book value made sense in the pre 2000 world of factories and inventory, but it made less sense in a world in which Microsoft's most valuable assets are its brand and its codebase. Intangibles, which barely register on a balance sheet, became the largest store of corporate value in the new millennium.

Value investing had to change. A greater emphasis on enterprise value (a measure of the company’s total value, typically based on debt plus equity market capitalisation less cash) and considering forward earnings, were a part of the approach to our value smart beta ETF, VLUE.

Now, like when we wrote our Vector Insights in 2021, the results of intelligently designed smart beta ETFs, appear to have been downplayed.

Why we struggle to believe it

Confirmation bias may be one explanation, but we think there could be a few others contributing.

Another favourite Vector Insights topic, the work of Daniel Kahneman and his framework outlined in his book Thinking, Fast and Slow, also provides a possible explanation about why investors overlook the value factor.

Kahneman outlines two thinking systems: System 1, quick, fast, intuitive decisions and System 2, careful deliberate reasoning. The distinction between the two has helped shape how economists and investors understand decision-making.

Most investors believe they are operating in System 2 when they evaluate a fund. In practice, we think System 1 is running the show.

This has been potentially highlighted, we think, by the findings of a paper that appeared in the CFA’s Financial Analysts Journal in February this year, Value versus Growth: What Drives the Value Premium, which seem to have been overlooked. The paper highlighted that the value premium is more pronounced during Federal Reserve monetary tightening cycles, periods with high long-term bond yields and high economic uncertainty, an environment global markets have navigated since 2022.²

Not all investors have benefited from this.

When the US Federal Reserve stared hiking cycle aggressively in 2022, it resulted in value outperforming. However, it was short lived (like in 2018), as the US Central Bank eased rates into the end of 2024 despite inflation still being above its target.

Now since the middle of last year, the value factor has outperformed. This time for a longer period, and our System 1 has kicked in. The instinctive reaction to strong value performance has seemingly been to follow the System 1 script: "It won't last", "Value lags growth over the long run", or "There is a lot of uncertainty, I'll wait until the picture is clearer."  

We don’t think these are analytical conclusions, rather they are the rationalised outputs of a prior belief, otherwise known as, confirmation bias.

What makes this particularly interesting today, with the advent of AI, is that new research from Wharton postdoctoral researcher Steven Shaw and Professor Gideon Nave suggests Kahneman's two-system model may now be incomplete³. Their Tri-System Theory proposes that, in a world where AI is available, a third mode of cognition has emerged. This third system can override both intuition and deliberation, leaving people more confident in their conclusions even when those conclusions are wrong.

The implication for investors is unsettling: it is increasingly possible to feel certain, to have done the research, and still have surrendered your judgment to a framework, whether algorithmic or narrative, that is reinforcing what you already believed.

The value sceptic who runs their analysis through an AI assistant may find their prior biases handed back to them, dressed in the authority of data.

The harder question

The hard question is not whether the evidence is compelling. The harder question is why compelling evidence so often fails to move us.

In funds management, as we argued in 2021, confirmation bias is rife. Now, an investor who has long believed that value is a value trap, or that active management adds reliability, will look at a smart beta ETF’s performance, like VLUE, and find a reason it doesn't apply to them. They will note the years it underperformed, and there will be years, and treat them as confirmation.

The evidence on value, beyond price-to-book, is now substantial, persistent, and peer-reviewed.

This also extends to research about other factors, factor investing and the economic and rate environments that correlate with factor performance. Research includes the quality factor, which underpins our International Quality ETF (QUAL) and the Growth factor, which underpins our International Growth ETF (GWTH).

Maybe the confirmation bias that resulted in many investors overlooking smart beta ETFs in 2021 persists today, beyond VLUE and the value factor.

It is challenging for investors to navigate economic conditions and prevailing markets. Smart beta ETFs that capture identifiable factors, we think are useful investment tools, to either hold through the cycle, or blend together, to help mitigate the troughs of the cycle.

You can read more about each of the factors here:

Quality Investing: An investment approach focused on quality companies

Value Investing: An approach focused on identifying stocks with prices that seem to understate their intrinsic value.

Growth Investing: An approach focused on identifying companies poised for rapid revenue and earnings expansion

We also have a dedicated page for smart beta:

Smart beta ETFs: combining the best of passive and active investing

We think sceptics will continue to point to periods of underperformance to support their previous assumptions. The data can tell a different story, if you’re willing to seek out information that challenges your bias. The question may be, are you willing to?

As always, we recommend you speak to an investment professional to determine which investment/blend is right for you.

Key risks

An investment in VLUE, QUAL or GWTH carries risks associated with: ASX trading time differences, financial markets generally, individual company management, industry sectors, foreign currency, country or sector concentration, political, regulatory and tax risks, fund operations and tracking an index. See the PDS and TMD for more details.

QUAL, VLUE and GWTH is likely to be appropriate for a consumer who is seeking capital growth, is intending to use the product as a major, core, minor or satellite allocation within a portfolio, has an investment timeframe of at least 5 years, and has a high risk/return profile

*A confirmation bias experiment we think best highlights how to understand it: The Wason Card Task.

Participants are presented with four cards on a table and are told that each card has a letter on one side and a number on the other. Participants can see one vowel, one consonant, one odd number and one even number facing up (eg, A, B, 1, and 2). Participants are asked to test this hypothesis: “If a card has a vowel on one side, it has an even number on the other.” But they can only turn over two cards to determine whether the hypothesis is true.

Most people turn over the vowel and then turn over the even number even though both actions will prove the hypothesis, not disprove it.

The correct answer is to turn over the vowel (which must reveal an even number, for the rule to be valid), and the odd number (which must NOT reveal a vowel, for the rule to be valid).

People only seek evidence to confirm a theory, at the expense of evidence that could prove it to be false.

This is confirmation bias.

1 - Michael Pompian, Behavioral Finance and Wealth Management: How to Build Optimal Portfolios That Account for Investor Biases, Wiley, 2006.

2 – Linda Chen, Wei Huang, and George Jiang, Value versus Growth: What Drives the Value Premium, Financial Analysts Journal, 2026 vol. 82, no. 2

3 – Steven Shaw & Gideon Nave, Thinking—Fast, Slow, and Artificial: How AI is Reshaping Human Reasoning and the Rise of Cognitive Surrender, The Wharton School Research Paper, Posted: 2 Feb 2026