RFV - IVOV: A Well-Diversified Value ETF For Long-Term Investors

2023-08-06 06:44:57 ET

Summary

• Vanguard S&P Mid-Cap 400 Value ETF implements a systematic strategy based on value and growth ratios.
• It is well-diversified across sectors and holdings.
• The underlying index has outperformed the S&P Mid-Cap 400 benchmark since 2000.
• Liquidity is low compared to peers.

This article series aims at evaluating ETFs (exchange-traded funds) regarding past performance and portfolio metrics. Reviews with updated data are posted when necessary.

IVOV strategy and portfolio

Vanguard S&P Mid-Cap 400 Value ETF ( IVOV ) started investing operations on 09/07/2010 and tracks the S&P 400 Value Index. It has 299 holdings, a 12-month distribution yield of 1.82% and an expense ratio of 0.15%. The same portfolio is also available as a mutual fund ( VMFVX ). the fund is a direct competitor to iShares S&P Mid-Cap 400 Value ETF ( IJJ ) and SPDR S&P 400 Mid Cap Value ETF ( MDYV ), which track the same index and have similar management fees. Therefore, if you have read my recent review of MDYV, some data are similar in this one.

The Vanguard ETF is more recent, and has lower AUM and dollar trading volumes than its peers.

As described by S&P Dow Jones Indices , S&P 400 constituents are classified in value and growth subsets using three valuation ratios and three growth metrics. The valuation ratios are book value to price, earnings to price and sales to price. By construction, 33% of S&P 400 constituents exclusively belongs to each style, and 34% belongs to both styles. The value subset serves as S&P 400 Value Index and is rebalanced annually. It is capital-weighted, with an adjustment for constituents belonging to both styles. For example, a company with a value rank better than its growth rank is given a larger weight in the Value Index than in the Growth Index. The turnover rate was 33% of the average portfolio value in the most recent fiscal year.

IVOV valuation metrics are not much better than for the parent index S&P Mid-Cap 400, represented in the next table by iShares Core S&P Mid-Cap ETF ( IJH ).

Source: Fidelity

The heaviest sectors in the portfolio are industrials (22.6% of asset value), consumer discretionary (18.4%) and financials (16.5%). Other sectors are below 11%. Compared to IJH, IVOV overweights mostly consumer discretionary, financials and real estate. It almost ignores energy.

The next table lists the top 10 holdings with their weights and valuation ratios. They represent only 8.4% of assets, and none of them is above 1.3%. The portfolio is well-diversified and risks related to individual companies are very low.

Ratios: Portfolio123

Performance

Since inception, IVOV is close behind IJH in total return. The difference in annualized return is only 32 bps. Historical data point to a slightly higher risk, measured in maximum drawdown and standard deviation of monthly returns ("volatility" in the table below).

Data calculated with Portfolio123

IJJ tracks the same underlying index, and it is much older (07/24/2000). It may be used to assess the S&P MidCap 400 Value Index on a longer period. It has outperformed IJH by one percentage point in annualized return since 8/1/2000.

Data calculated with Portfolio123

The next chart compares the 10-year total returns of IVOV underlying index (represented here by MDYV) and four other mid-cap value funds:

• iShares Russell Mid-Cap Value ETF ( IWS )
• Vanguard Mid-Cap Value ETF ( VOE ),
• iShares Morningstar Mid-Cap Value ETF ( IMCV ),
• Invesco S&P MidCap 400 Pure Value ETF ( RFV ).

RFV is the best performer on this time frame.

Compari son with my Dashboard List model

The Dashboard List is a list of 60 to 80 stocks in the S&P 1500 index, updated every month based on a simple quantitative methodology. All stocks in the Dashboard List are cheaper than their respective industry median in Price/Earnings, Price/Sales and Price/Free Cash Flow. An exception in utilities: the Price/Free Cash Flow is not taken into account to avoid some inconsistencies. Then, the 10 eligible companies with the highest Return on Equity in every sector are kept in the list. Some sectors are grouped together: energy with materials, communication with technology. Real estate is excluded because these valuation metrics don't work well in this sector. I have been updating the Dashboard List every month on Seeking Alpha since December 2015.

The next table compares IVOV underlying index (based on IJJ price history) since 8/1/2000 with the Dashboard List model, with a tweak: here, the list is reconstituted once a year to make it comparable with a passive index.

Past performance is not a guarantee of future returns. Data Source: Portfolio123

The Dashboard List outperforms IVOV by about 2 percentage points in annualized return. A note of caution, though: ETF price history is real, whereas the list simulation is hypothetical.

Two common shortcomings in value indexes

Most value indexes have two weaknesses, and IVOV is no exception. The first one is to classify all stocks on the same criteria. It means valuation ratios are considered comparable across sectors and industries. Obviously, they are not: my monthly dashboard here shows how valuation and quality metrics may vary across sectors.

The second shortcoming comes from the price/book ratio (P/B), which adds some risk in the strategy. Historical data show that a large group of companies with low P/B has a higher volatility and deeper drawdowns than a same-size group with low price/earnings, price/sales or price/free cash flow. The next table shows the return and risk metrics of the cheapest quarter of the S&P 500 (i.e. 125 stocks) measured in price/book, price/earnings, price/sales and price/free cash flow. The sets are reconstituted annually between 1/1/2000 and 1/1/2023 with elements in equal weight.

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