FVAL - VOOV: Ahead Of Competitors In 2023

2023-12-07 16:25:20 ET

Summary

• Vanguard S&P 500 Value Index Fund ETF Shares selects and weights S&P 500 stocks based on fundamental ratios.
• The methodology creates two overlapping Value and Growth sets based on 6 metrics. The VOOV ETF invests in the Value set.
• VOOV is well-diversified, shows a low tracking error and has outperformed competitors in the last 5 years.

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

VOOV strategy

Vanguard S&P 500 Value Index Fund ETF Shares ( VOOV ) started investing operations on 09/07/2010 and tracks the S&P 500 Value Index. It has 400 holdings, a 12-month distribution yield of 1.81% and a cheap expense ratio of 0.10%. Dividends are paid quarterly. It is a direct competitor to iShares S&P 500 Value ETF ( IVE ) and SPDR® Portfolio S&P 500 Value ETF ( SPYV ), two funds tracking the same underlying index.

VOOV is the most recent and less liquid of the three funds. The expense ratio is a bit higher than for SPYV. However, it has the best 10-year price return, probably due to a better management of tracking errors.

As described by S&P Global , S&P 500 (SP500) constituents are ranked in Value and Growth styles using 6 valuation and growth metrics. The valuation ratios are book value to price, earnings to price, and sales to price. By construction, 33% of the parent index constituents exclusively belongs to each style, and 34% belongs to both styles. The Value subset serves as S&P 500 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.

VOOV portfolio

VOOV invests almost exclusively in U.S. companies (about 99% of asset value), mostly in the large cap segment (73%).

The top two sectors are financials (19.2%) and technology (18.6%), followed by industrials (11.9%), consumer discretionary (11.1%) and communication (10.2%). Other sectors are below 9%. Compared to the S&P 500 (SPY), the fund underweights technology, healthcare and energy. It overweights mostly financials, industrials, utilities and real estate. As a result, it is better balanced across sectors than the parent index.

As expected, VOOV is cheaper than the S&P 500 regarding the usual valuation ratios, as reported in the next table.

The top 10 holdings, listed in the next table with weights and valuation ratios, represent 27.6% of asset value. The top name, Microsoft Corp, represents 6.6% of assets. Risks related to other individual companies are moderate. Readers may be surprised to find Meta Platforms and Amazon in second and third position of a value fund. In fact, unlike the top name Microsoft, they both have a lower weight in the S&P 500 Growth Index than in the Value Index.

Ratios: Portfolio123.

Performance

Since 10/1/2010, VOOV has underperformed SPY by 1.75% in annualized return and shows a slightly higher risk measured in maximum drawdown.

Data calculated with Portfolio123.

The next chart compares the 5-year total returns of VOOV and four passively managed large cap value funds tracking different indexes:

• iShares Russell 1000 Value ETF ( IWD )
• Invesco S&P 500 Pure Value ETF ( RPV )
• Fidelity Value Factor ETF ( FVAL )
• First Trust Large Cap Value AlphaDEX Fund ( FTA ).

VOOV and FVAL are leading the pack, almost a tie. Surprisingly, the chart below shows the same pattern in the last 12 month: they are almost tied, ahead of competitors.

Comparing VOOV with my Dashboard List model

The Dashboard List is a list of 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. After this filter, the 10 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, first in free-access articles, then in Quantitative Risk & Value.

The next table compares VOOV performance since 10/1/2010 with the Dashboard List model, with a tweak: the list is reconstituted quarterly instead of once a month to make it comparable to a passive index.

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

The Dashboard List outperforms VOOV by almost 2% in annualized return. However, ETF performance is real and the list simulation is hypothetical.

Price to Book: a risky concept of value

Most value indexes mixing various ratios to rank value stocks have two weaknesses, and the S&P 500 Value Index is no exception. The first one is to classify all stocks on the same criteria. It means the 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. A few ETFs have a more sophisticated approach, like Fidelity® Value Factor ETF ( FVAL ), reviewed here , and some actively managed value funds.

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.

Data calculated with Portfolio123.

This explains why I use P/FCF and not P/B in the Dashboard List model.

Takeaway

Vanguard S&P 500 Value ETF selects and weights S&P 500 stocks based on value characteristics. The methodology creates two overlapping Value and Growth sets based on fundamental metrics. VOOV invests in the Value set. It is better diversified across sectors than the parent index S&P 500. It has lagged it since 2010, but this period was favorable to growth stocks: most value-oriented strategies have underperformed in this time frame. T

he Value style might outperform in a bear market, like it did in 2022. VOOV is less liquid than two other funds with the same index, but it shows a lower tracking error on a 10-year time frame (therefore a better return). It has performed quite well relative to other passively managed value ETFs. Vanguard S&P 500 Value Index Fund ETF Shares may be used as a long-term investment, but also as a component of a tactical allocation strategy switching between the growth and value styles. However, I see two shortcomings in the underlying index: it ranks stocks regardless of their sectors, and it relies too much on the price-to-book ratio.

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