2023-08-09 16:01:13 ET
Summary
- Vanguard Mid-Cap Value Index Fund ETF Shares implements a value strategy based on five factors and has a well-diversified portfolio.
- VOE's valuation ratios are surprisingly expensive for a value fund, and it has failed to bring excess return over a mid-cap benchmark in the long term.
- The VOE ETF may be useful in a tactical allocation strategy, but the underlying index has methodological weaknesses.
This article series aims at evaluating ETFs (exchange-traded funds) regarding past performance and portfolio metrics. Reviews with updated data are posted when necessary.
VOE strategy and portfolio
Vanguard Mid-Cap Value Index Fund ETF Shares ( VOE ) started investing operations on 08/17/2006 and tracks the CRSP US Mid Cap Value Index. It has 194 holdings, a 12-month distribution yield of 2.31% and a cheap expense ratio of 0.07%. Distributions are paid quarterly. This index and portfolio are also available as a mutual fund ( VMVAX ). As described on CRSP's website , stocks are selected using five factors: book to price, forward earnings yield, past earnings yield, dividend yield and sales-to-price ratio. The portfolio's turnover rate was 18% in the most recent fiscal year.
Before 4/16/2013, VOE was tracking the MSCI US Mid Cap Value Index. Therefore, historical data before April 2013 are irrelevant to assess the current strategy. It also means that back-tests including VOE before this date may be misleading.
VOE invests almost exclusively in U.S. based companies (98.4% of asset value). Surprisingly, VOE is more expensive than the mid-cap benchmark SPDR S&P MIDCAP 400 ETF ( MDY ) regarding the price/earnings ratio. Other valuation ratios are similar, as reported in the next table.
VOE | MDY | |
Price/Earnings TTM | 15.93 | 13.7 |
Price/Book | 2.11 | 2.22 |
Price/Sales | 1.13 | 1.19 |
Price/Cash Flow | 10.66 | 10.45 |
Financials are the heaviest sector in the portfolio (17.2%), followed by industrials (16.10%) and consumer discretionary (14.10%). Compared to the mid-cap benchmark, the fund massively overweights utilities and consumer staples. It underweights mostly industrials, technology, and communication.
The top 10 holdings, listed below with valuation ratios, represent 12.2% of asset value. The heaviest position weights 1.44%, 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 CashFlow | Yield% |
Arthur J. Gallagher & Co. | 1.44% | 42.99 | 25.12 | 5.27 | 4.65 | 41.41 | 1.00 | |
PACCAR, Inc. | 1.34% | 12.28 | 9.98 | 1.38 | 2.97 | 50.25 | 3.45 | |
Carrier Global Corp. | 1.27% | 22.77 | 21.85 | 2.24 | 6.13 | 32.97 | 1.29 | |
Nucor Corp. | 1.26% | 7.85 | 9.24 | 1.14 | 2.13 | 7.20 | 1.20 | |
PG&E Corp. | 1.24% | 19.37 | 14.47 | 1.69 | 1.60 | N/A | 0 | |
Corteva, Inc. | 1.18% | 41.89 | 19.20 | 2.21 | 1.47 | N/A | 1.18 | |
Rockwell Automation, Inc. | 1.16% | 24.90 | 25.52 | 4.10 | 10.57 | 135.59 | 1.54 | |
D.R. Horton, Inc. | 1.14% | 9.07 | 9.66 | 1.26 | 2.02 | 15.04 | 0.78 | |
Centene Corp. | 1.13% | 13.66 | 10.23 | 0.25 | 1.42 | 4.77 | 0 | |
Ameriprise Financial, Inc. | 1.06% | 17.62 | 11.47 | 2.39 | 9.21 | 7.43 | 1.56 |
Since it started executing the current strategy in April 2013, VOE has underperformed MDY by 53 bps in annualized return. The two funds have similar risk metrics, as reported in the next table (maximum drawdown and volatility).
Total Return | Annual Return | Drawdown | Sharpe ratio | Volatility | |
VOE | 162.00% | 9.81% | -43.18% | 0.58 | 16.75% |
MDY | 175.27% | 10.34% | -42.18% | 0.59 | 17.68% |
Data calculated with Portfolio123.
The next chart compares the 10-year total returns of VOE and four other mid-cap value funds:
- iShares Russell Mid-Cap Value ETF ( IWS ),
- SPDR S&P 400 Mid Cap Value ETF ( MDYV ),
- iShares Morningstar Mid-Cap Value ETF ( IMCV ),
- Invesco S&P MidCap 400 Pure Value ETF ( RFV ).
RFV is the best performer and VOE is in the middle of the pack.
In 2023 to date, VOE has been lagging:
Comparing VOE with my value benchmark
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, first in free-access articles, then in Quantitative Risk & Value.
The next table compares VOE performance since it changed indexes in 2013 with the Dashboard List model, with a tweak: here the list is reconstituted annually to make it comparable with a passive index.
Total Return | Annual Return | Drawdown | Sharpe ratio | Volatility | |
VOE | 162.00% | 9.81% | -43.18% | 0.58 | 16.75% |
Dashboard List (annual) | 239.40% | 12.61% | -41.13% | 0.67 | 18.54% |
Past performance is not a guarantee of future returns. Data Source: Portfolio123.
The Dashboard List beats VOE by 2.8 percentage points in annualized return. Nonetheless, ETF price history is real, whereas the model simulation is hypothetical.
Two shortcomings of value ETFs
I like the idea of mixing various ratios to rank value stocks. However, I think most value indexes doing so have two weaknesses, and VOE 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. Obviously, they are not: my monthly dashboard here shows how valuation and quality metrics may vary across sectors.
The second weakness 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.
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
Vanguard Mid-Cap Value ETF implements a value strategy based on five factors. It is well-diversified across sectors and holdings. Its valuation ratios are surprisingly expensive for a value fund. Historical performance is average among other mid-cap value ETFs, and VOE has been lagging a bit in 2023. Moreover, it has failed to bring excess return over a mid-cap benchmark on the long term.
However, Vanguard Mid-Cap Value Index Fund ETF Shares may be useful in a tactical allocation strategy switching between value and growth styles, or between large and mid-cap categories. Like for most value ETFs, the underlying index has two methodological weaknesses: ranking stocks regardless of their sectors, and relying too much on the price/book ratio.
For further details see:
VOE: Value ETF Lagging Its Peers In 2023