2023-12-20 07:00:00 ET
Summary
- iShares Core S&P U.S. Value ETF, one of the oldest value ETFs in the market, is well-diversified across sectors and holdings.
- The IUSV ETF has outperformed the Russell 1000 Index since 2000 and most competitors since 2016, except one.
- IUSV may be used as a long-term investment or a component of tactical allocation strategies.
This article series aims at evaluating ETFs (exchange-traded funds) regarding the relative past performance of their strategies and metrics of their current portfolios. Reviews with updated data are posted when necessary.
IUSV strategy and portfolio
iShares Core S&P U.S. Value ETF ( IUSV ) started operations on 7/24/2000 and tracks the S&P 900 Value Index. It has a portfolio of 742 stocks, a trailing 12-month distribution yield of 1.87%, and a cheap expense ratio of 0.04%. Distributions are paid quarterly.
As described by S&P Global , S&P 900 constituents are classified into two “Value” and “Growth” styles using a systematic process based on 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 900 constituents exclusively belong to each style, and 34% belong to both styles. The “Value” style subset serves as S&P 900 Value Index and is rebalanced annually. It is capital-weighted, with a “style strength” adjustment for constituents belonging to both styles. These stocks get a higher weight in the value index than in the growth index when their value rating is higher than their growth rating, and the other way.
IUSV invests almost exclusively in U.S.-based companies (over 99% of asset value), and mostly in large and mega-caps (about 69%). As there is no ETF tracking the full S&P 900 Index, I will use iShares Russell 1000 ETF ( IWB ) as a benchmark. The S&P 900 and the Russell 1000 indexes are quite similar in their composition.
As expected from a value fund, IUSV is cheaper than IWB regarding valuation ratios:
IUSV | IWB | |
Price/Earnings TTM | 18.79 | 21.98 |
Price/Book | 2.57 | 3.85 |
Price/Sales | 1.77 | 2.45 |
Price/Cash Flow | 12.92 | 15.42 |
The top three sectors are financials (21.8%), healthcare (17.8%) and industrials (11.6%). Other sectors are below 10%. Compared to the Russell 1000, the fund massively underweights technology, consumer discretionary and communication. It overweights all other sectors.
The portfolio is well-diversified: the top 10 holdings, listed in the next table with valuation ratios, represent 16.9% of asset value. The heaviest one, Berkshire Hathaway, weighs 3.3%. Other constituents are below 2.5%, so risks related to individual companies are low.
Ticker | Name | Weight | P/E TTM | P/E fwd | P/Sales TTM | P/Book | P/Net Free Cash Flow | Yield% |
Berkshire Hathaway Inc. | 3.29 | 10.23 | 20.79 | 1.97 | 1.49 | 29.19 | 0 | |
JPMorgan Chase & Co. | 2.42 | 9.92 | 9.97 | 2.15 | 1.68 | 4.70 | 2.53 | |
Exxon Mobil Corp. | 2.05 | 10.11 | 11.00 | 1.19 | 2.05 | 17.82 | 3.74 | |
Johnson & Johnson | 1.88 | 29.67 | 15.56 | 4.16 | 5.56 | 102.20 | 3.06 | |
UnitedHealth Group, Inc. | 1.52 | 22.85 | 21.10 | 1.37 | 5.83 | 24.80 | 1.43 | |
Chevron Corp. | 1.32 | 11.13 | 11.19 | 1.39 | 1.70 | 28.08 | 4.04 | |
Bank of America Corp. | 1.16 | 9.37 | 9.70 | 1.61 | 1.04 | 12.43 | 2.87 | |
The Home Depot, Inc. | 1.11 | 22.51 | 23.28 | 2.28 | 245.08 | 36.79 | 2.38 | |
Walmart, Inc. | 1.11 | 25.73 | 23.98 | 0.66 | 5.27 | 63.79 | 1.47 | |
Procter & Gamble Co. | 1.06 | 23.76 | 22.73 | 4.35 | 7.72 | 65.18 | 2.57 |
Performance
Since inception, IUSV has outperformed IWB by 71 bps in annualized return, but its maximum drawdown is deeper by almost 5 percentage points, as reported in the next table. Nevertheless, volatility, measured as standard deviation of monthly returns, is not significantly different from the benchmark.
Total Return | Annual Return | Drawdown | Sharpe ratio | Volatility | |
IUSV | 494.86% | 7.93% | -60.18% | 0.45 | 15.73% |
IWB | 409.82% | 7.22% | -55.38% | 0.4 | 15.69% |
The value style has alternatively outperformed and underperformed the market during quite long periods. IUSV has lagged IWB in the last 10 years, but beats it on a 3-year time frame:
Comparing IUSV 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 on 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 my investing group Quantitative Risk & Value.
The next table compares IUSV performance since inception with the Dashboard List model, with a tweak: here, the list is reconstituted once a year to make it comparable with a passive index.
Total Return | Annual Return | Drawdown | Sharpe ratio | Volatility | |
IUSV | 494.86% | 7.93% | -60.18% | 0.45 | 15.73% |
Dashboard List (annual) | 1270.00% | 11.85% | -58.13% | 0.62 | 17.36% |
Past performance is not a guarantee of future returns. Data Source: Portfolio123.
The Dashboard List beats IUSV by almost 4% in annualized return. However, ETF performance is real, whereas the model performance is simulated and hypothetical.
IUSV vs competitors
The next table compares characteristics of IUSV and 5 passively managed, large-cap value ETFs:
- iShares Russell 1000 Value ETF ( IWD )
- Vanguard Value Index Fund ETF Shares ( VTV )
- iShares MSCI USA Value Factor ETF ( VLUE )
- Schwab U.S. Large-Cap Value ETF ( SCHV )
- Fidelity Value Factor ETF ( FVAL ).
IUSV | IWD | VTV | VLUE | SCHV | FVAL | |
Inception | 7/24/2000 | 5/22/2000 | 1/26/2004 | 4/16/2013 | 12/11/2009 | 9/12/2016 |
Expense Ratio | 0.04% | 0.19% | 0.04% | 0.15% | 0.04% | 0.15% |
AUM | $15.41B | $54.87B | $148.66B | $6.89B | $10.29B | $629.21M |
Avg Daily Volume | $61.53M | $456.33M | $403.40M | $36.04M | $32.79M | $5.18M |
1Y Price Performance | 19.58% | 9.38% | 6.64% | 9.45% | 6.05% | 19.82% |
5-Year Price Performance | 68.90% | 46.15% | 49.36% | 34.59% | 39.08% | 72.06% |
Dividend Yield | 1.87% | 2.04% | 2.47% | 2.75% | 2.44% | 1.70% |
Div. Growth 5 Yr (annualized) | 4.10% | 3.50% | 7.12% | 8.20% | 2.44% | 7.89% |
IUSV and FVAL are ahead of the pack regarding price return on 1-year and 5-year time frames. IUSV is larger and more liquid than FVAL, making it a better instrument for trading and tactical allocation. It also has a cheaper expense ratio.
The next chart compares total returns since 9/19/2016 to match all inception dates. IUSV is the second-best performer behind FVAL.
Price to Book: a risky concept of value
I like the idea of mixing various ratios to rank value stocks like IUSV does. However, I think most value indexes doing so have two weaknesses. 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. FVAL, reviewed here , has a more sophisticated approach.
The second weakness comes from the price/book ratio (P/B), which adds some risk to the strategy. Historical data show that a large group of companies with low P/B has 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 of equal weight.
Annual Return | Drawdown | Sharpe ratio | Volatility | |
Cheapest quarter in P/B | 8.54% | -81.55% | 0.35 | 37.06% |
Cheapest quarter in P/E | 10.71% | -73.62% | 0.48 | 25.01% |
Cheapest quarter in P/S | 12.82% | -76.16% | 0.47 | 34.83% |
Cheapest quarter in P/FCF | 15.32% | -74.77% | 0.61 | 27.03% |
Data calculated with Portfolio123.
This explains why I use P/FCF and not P/B in the Dashboard List model.
Takeaway
iShares Core S&P U.S. Value ETF is one of the oldest value ETFs in the market. It holds over 700 stocks and its heaviest sectors are financials, healthcare, and industrials. It is well-diversified across sectors and holdings. It has outperformed the benchmark since 2000 and most competitors since 2016. It has lagged Fidelity Value Factor ETF, which features a smarter strategy but is less liquid.
The underlying index has two methodological weaknesses: ranking stocks regardless of their industries and relying too much on the price/book ratio. iShares Core S&P U.S. Value ETF may be used as a long-term investment or a component of tactical allocation strategies switching between value and growth styles.
For further details see:
IUSV: An Old Value ETF Beating Most Competitors