IJS - I Replaced IJS ETF With XSVM ETF: Good Timing?

Summary

• The iShares S&P Small-Cap 600 Value ETF invests based on the S&P SmallCap 600 Value Index.
• The Invesco S&P SmallCap Value with Momentum ETF invests based on the S&P SmallCap 600 High Momentum Value Index.
• Both ETFs and their respective index are reviewed. I then compare each ETF based on allocations, returns, and risk. I include the iShares Core S&P Small-Cap ETF here.
• Over the past 3-,5-, and 10-year periods, XSVM was the best performer. Recently, IJS has taken that title. It could be I switched too soon; time will tell.

(This article was co-produced with Hoya Capital Real Estate )

Introduction

My investment resolution for 2023 was to review each of our investment accounts ( article link ) and align their holdings with our long-term goal for each account; some of whom have allocations that are not properly aligned. A second but critical part of that effort is reviewing what we hold to see if it is still the best ETF for that market segment, assuming that allocation itself still makes sense in terms of that account's mandate/purpose.

As part of that strategy, I replaced the iShares S&P Small-Cap 600 Value ETF ( IJS ) with the Invesco S&P SmallCap Value with Momentum ETF ( XSVM ). The names clearly state the philosophy difference between the ETFs. The 3, 5, and 10-years returns say this is a good long-term switch. As the title asks, but was now the right time? As I will show later, IJS has been the better ETF recently. That doesn't mean the switch was wrong, but the timing might not have been the best, but I should have done this deeper due diligence before making the trade!

iShares S&P Small-Cap 600 Value ETF review

Seeking Alpha describes this ETF as:

The iShares S&P Small-Cap 600 Value ETF managed by BlackRock Fund Advisors. The investment seeks to track the investment results of the S&P SmallCap 600 Value Index , composed of small-capitalization U.S. equities that exhibit value characteristics. IJS started in 2000.

Source: seekingalpha.com IJS

IJS has $8.2b in AUM with the managers collecting 18bps in fees. Investors currently received a TTM Yield of 1.3%.

Index review

I like to start index-based ETFs with an overview of the underlying index. S&P describes the index used as:

We measure value stocks using three factors: the ratios of book value, earnings, and sales to price. S&P Style Indices divide the complete market capitalization of each parent index into growth and value indices. Constituents are drawn from the S&P SmallCap 600®.

Source: spglobal.com Index

Features of that index include the following.

The index is rebalanced each quarter and uses a float-adjusted market-cap weighting process. The IJS ETF is one of three US-based ETFs based on this index. As listed above, three factors are used to weight a stock as Growth, Value, or combination. These are the factors used for each strategy.

The final breakdown after ranking each stock on the above factors is: 33% classified as Growth, another 33% as Value, and the middle 34% are weighted in both indices as such:

The middle 34% of float market capitalization consists of companies that have similar growth and value ranks. Their market capitalization is distributed among the Style indices based on their distances from the midpoint of the Growth basket and the midpoint of the Value basket, as detailed below. The midpoint of each Style region is calculated as the average of Value Scores and Growth Scores of companies in the Style basket.

Source: spglobal.com methodology.pdf

This results in 187 stocks being in both the S&P 600 Value and the Growth indices. Overall, IJS holds just over 500 of the 600 stocks in the index, whereas the Growth version only holds 370.

IJS holdings review

The sector allocations for this ETF are:

Being smaller companies, Technology stocks have less influence in this market-cap segment; with the Real Estate sector all the way up to the 4th largest allocation.

Not counting the cash held, the next 20 holdings account for just under 13% of the portfolio.

At 18%, the bottom half of the portfolio still can affect the results achieved by the IJS ETF. The ETF holds 4 contracts of the RUSSELL 2000 EMINI CME MAR 23 futures so the cash holdings has equity exposure.

IJS distribution review

The ETF has seen its payout grow 4-5% over the past 5- and 10-years, though at 1.3%, income is not a prime reason to own this ETF.

Invesco S&P SmallCap Value with Momentum ETF review

Seeking Alpha describes this ETF as:

The Invesco S&P SmallCap Value with Momentum ETF invests in value and momentum stocks of small-cap companies. The fund seeks to track the performance of the S&P SmallCap 600 High Momentum Value Index , which is designed to measure the performance of 120 stocks in the S&P SmallCap 600® Index that have relatively high “value” and “momentum” scores. XSVM started in 2005.

Source: seekingalpha.com XSVM

XSVM has $692m in AUM with the managers collecting 36bps in fees; twice what IJS ETF investors pay. The TTM Yield is 1.64%.

Index review

S&P provides this description:

The S&P SmallCap 600 High Momentum Value Index is designed the measure the performance of 120 stocks within the S&P SmallCap 600 with attractive valuations with a momentum overlay.

Source: spglobal.com Index

Looking at the same index characteristics, we see:

Using the S&P SmallCap 660 Value constituents, the stocks with the highest Momentum score are selected. A buffer rule is used to minimize index turnover. Here is how the Momentum score is calculated.

XSVM holdings review

Here, the Top 4 sectors are over 71% of the portfolio, with the next sector pushing that allocation to over 80%. Again, Technology stocks do not play a major role in this ETF.

Holding many fewer stocks, the Top 20 account for 27% of the portfolio, twice the concentration level of IJS. Offsetting that is the bottom half also having twice the allocation of IJS at 36%. With the holdings weighted by their Value score, the distribution is tighter than IJS's, which is market-cap weighted.

XSVM distribution review

While payouts are quarterly, there were some years where one payment was skipped.

Comparing ETFs

For parts of this process, I included the iShares Core S&P Small-Cap ETF ( IJR ) to show how each strategy differs from the non-factored ETF based on the related index. Based on sectors, the Top3 in all three ETFs align, though some weights differ greatly.

The sectors in Green are ones where the XSVM ETF overweights compared to the IJS ETF; the Yellow is where the opposite occurs. Due to its momentum strategy, the weights amongst the XSVM sectors should move more than what IJS investors should experience.

This came as a bit of a surprise but data from two other sites showed the same results; that being XSVM has a higher Value allocation than IJS does!

The ratio data does confirm what the Vanguard Style boxes indicate.

The Top 10, while a little dated, show few, if any, stocks in common.

All of that translates into these results that investors have experienced.

Looking at the yearly results shows one of the two ETFs "winning" usually for several years in a row. If that is the case, as IJS is now performing better, than the answer to my question seems to be "you timed that switch wrong"! If so, the other Small-Cap funds we hold should help to offset the minor weight-shift of this trade.

Portfolio strategy

When I picked the XSVM ETF to replace two iShares Small-Cap ETFs, I think I reviewed CAGR data on over a dozen funds I was familiar with. These are some and the list shows one of the data decisions investors need to make: "How much history to consider?".

The recent performance of the Invesco S&P SmallCap 600 Pure Value ETF ( RZV ) has it on top now for 3-year and under returns, but that wasn't the case when I wrote this article: VIOV Vs. RZV: Getting Too Fancy In The Small-Cap Value Space last fall.

Another reason behind that Small-Cap ETF switch was reducing my overall Small-Cap exposure as the allocation to XSVM was a fraction of what I held in IJS and the iShares S&P Small-Cap 600 Growth ETF ( IJT ), which I also liquidated. The following style chart shows we are overweight Small-Cap stocks in general, and SCV stocks by a wide margin; compared to the Index.

When I include my 401(k) assets, which Fidelity classifies as "unknown", the total shifts away from Small-Cap. A large part of the "equity" exposure comes from the way Fidelity classifies BDCs as being mostly Small-Cap equities, which I do not consider them. Some of the allocation is from "drift" within my Mid-Cap ETFs or Total-Market ETFs allocation to this market-cap. In total, Fidelity says I have 30 stocks, funds, BDCs, or REITs making up that Small-Cap allocation. It also includes my Small-Cap international exposures and Micro-Cap funds. The point being, one needs to look "under the hood" when examining allocation or other data provided by a 3rd party.

Final thoughts

In terms of was the timing best, like deciding when to start Social Security, the answer might not be known for years. A successful investor is okay with that and does not dwell on the past. Because of various laws around investment accounts, we have a lot to keep track of, but try to simply that task by owning the same funds in multiple accounts. For me, researching funds to cover for Seeking Alpha or reading articles others have written about funds I own or might consider has helped me stay abreast of what we own.

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