VTV - Go For The Value Factor; Think About IVE

2023-05-31 21:31:21 ET

Summary

• Value factor investing has regained an advantage over growth stocks, with iShares S&P 500 Value ETF being a popular choice for investors.
• IVE offers a diversified range of holdings, with a focus on the financial sector; yet it offers good diversification.
• However, IVE's expense ratio and performance may not lead to it being the most optimal choice for investors, with alternatives like Vanguard's Value ETF potentially presenting a better case.

Thesis

Value factor investing has been historically perceived to deliver strong returns. While the most prominent value investors rely on stock picking, for the average retail investors that want a more passive and diversifiable strategy, many Value ETFs are available, accessible at a low cost. In this analysis I focus on iShares S&P 500 Value ETF ( IVE ); one of the most popular choices in the space. I will explore the fund's attributes and relative performance to a group of its peers as well as the value factor's attractiveness in general.

After a very strong decade for growth stocks across the board, the past 3 years have been filled with volatility and as of recently with disappointment. Since 2020, growth stocks have seen a historic bullish momentum, propelled by the tech sector, that ended abruptly in early 2022, when many previously high-flying names suffered major losses. As a result, the value factor regained the advantage and IVE regained the performance edge over its growth counterpart (iShares S&P 500 Growth ETF).

Fund Identity & Sector Representation

The iShares S&P 500 ETF offers investors exposure to companies that are identified to be inexpensive relative to comparable firms. The fund aims to track the S&P 500 Value Index, charges a relatively high 0.18% expense ratio and pays a 1.99% distribution yield to investors. IVE currently has over $23B of assets under management.

IVE maintains a diversified range of approximately 400 holdings with a higher weighting toward the financial sector which traditionally has lower valuation multiples. Still, despite its value orientation the fund holds a large 18% weighting in the technology sector. Other sectors significantly represented by IVE include Industrials, Consumer Discretionary and Communications.

Value Factor Sector Exposure & Performance

While the growth factor is overweight in technology stocks, the value factor is dominated by financials. As such, it is clear that sector weights have been a key component of the outperformance of growth through the last decade, as well as its recent downfall as the tech sector struggled.

Another thing to notice is the fact that exposure toward the value factor should offer investors a much more defensive positioning, particularly useful during turbulent market times. Despite that, many value stocks reside in the consumer discretionary, industrial and real estate sectors, all rather cyclical in nature and able to propel returns during economic expansions. In a nutshell, the value stocks universe offers a much more balanced approach to investing, spreading the total exposure among many different sectors, with no extreme sector weighting (with a slight exception for financials).

Even though going long on the growth factor is likely to allow investors to capture positive market momentum effectively in the short-term, for those with a longer time horizon, value positioning is arguably superior. Even within growth-heavy indexes or sectors, playing the value game can be lucrative in the long term, as the chart presented below illustrates.

Firms with a lower P/E within the tech-heavy Nasdaq 100 sector have significantly outperformed higher-valued stocks. Companies with a forward P/E less than 22.6x have returned almost +350% since 2002, while firms with higher earnings multiples have gained around +150%. The period of this illustration is long enough to provide meaningful results, as it also included two major market crises that were particularly rough for the tech sector (global financial crisis and Covid-19).

Value ETF Showdown

While, in my view, the value factor has the comparative advantage to growth, especially for investors with a long-term horizon, the range of ETFs available to them in the value space is pretty wide, with four particularly standing out; one offered by each of the large ETF issuers in the U.S. The peer group includes the iShares S&P 500 ETF which is the subject of this analysis, the Vanguard Value ETF ( VTV ), the SPDR Portfolio S&P 500 Value ETF ( SPYV ) and the Schwab U.S. Large-Cap Value ETF ( SCHV ).

An initial look into some key characteristics and metrics for the peer group will reveal that Vanguard's fund is by far the largest. IVE holds a negative lead, regarding its expense ratio which is by far the most expensive. A 0.18% expense ratio in an era when sub-0.10% are industry standard causes some concern. In fact, for a long-term investing horizon, such an expense ratio can hurt overall returns rather noticeably.

On the other hand, IVE has performed well over the trailing 5 and 10 years (CAGRs of 9.35% and 9.43% respectively). All four funds are well-diversified, even though all are heavily weighted toward the financial sector. IVE, however, seems relatively expensive, based on a P/E of 20.17x, while also paying the lowest dividend yield of the group at 1.99%.

In a second attempt to gauge IVE's attractiveness, I employed the tools offered by Portfolio Visualizer in order to perform a risk & return performance backtest for the peer group. An initial $10,000 investing balance and dividend reinvesting were assumed for comparative purposes. Vanguard's VTV has recorded the best annualized return within the group (CAGR of 11.24%) and also the best risk-adjusted returns, with a Sharpe ratio of 0.76 (Sortino ratio of 1.20 as well). In terms of volatility (i.e. standard deviation) SCHV and VTV outperformed, while VTV also has the smallest maximum drawdown.

How does Value Compare to the Broad Market?

Despite some apparent advantages that value ETF investing has, at least relative to growth investing, when it comes to the comparison of the value factor to the broader market, the conclusions are somewhat contradicting. More specifically, while the value factor advantage has persisted for a long period of time, as of the past few years the broader market has performed better. On a 20-year reference period, this has led to the S&P 500 outperforming a value ETF like IVE.

Final Thoughts

After all things are considered, the existence of value factor investing benefits is an optimistic sign for long-term investors looking to outperform other strategies. However, when it comes to the range of major ETFs available for gaining value exposure, IVE seems to stand in the middle of the pack, indicating that other choices, for example Vanguard's Value ETF, might represent a more optimal choice. For these reasons, I would rate IVE as a hold.

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