IVE Missed The Value Train
Summary
- IVE strategy and performance.
- Comparing IVE with my value model.
- Why IVE missed the Value rally in 2020-2021.
- Looking for a helping hand in the market? Members of Quantitative Risk & Value get exclusive ideas and guidance to navigate any climate. Learn More »
IVE strategy and performance
The iShares S&P 500 Value ETF (NYSEARCA:IVE) has been tracking the S&P 500 Value Index since May 2000. The SEC Yield of IVE is currently 2.05% and the expense ratio is 0.18%.
As described by S&P Global, the underlying index selects companies in the S&P 500 index exhibiting the strongest value score based on three ratios: book value to price, earnings to price, and sales to price. It is weighted by market capitalization and rebalanced annually.
According to the prospectus, “The Underlying Index represented approximately 46% of the market capitalization of the S&P 500 as of March 31, 2020. As of March 31, 2020, a significant portion of the Underlying Index is represented by securities of companies in the financials and healthcare industries or sectors.”
Since inception (5/22/2000), IVE return and risk metrics are not much different from those of the S&P 500 (SPY).
Annual.Return | Drawdown | Sharpe ratio | Volatility | |
IVE | 6.75% | -61.61% | 0.39 | 16.25% |
SPY | 7.33% | -55.42% | 0.44 | 15.22% |
The next chart plots the equity value of $100 invested in IVE and SPY since IVE inception.
IVE has alternatively outperformed and lagged SPY. Taking IVE inception as starting point, the two ETFs were almost on par when the 2020 market meltdown occurred. Then, the value ETF lagged the broad index in the recovery.
Comparing IVE with my Dashboard List model
The Dashboard List is a list of 80 stocks in the S&P 1500 index (occasionally less), updated every month based on simple systematic rules. Eligible companies are cheaper than their respective industry median in Price/Earnings, Price/Sales and Price/Free Cash Flow. Then, 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, Telecom with Technology. Real Estate is excluded. 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 IVE performance since inception with the Dashboard List model, with a tweak: here the list is reconstituted only once a year like the ETF instead of once a month.
since inception | Annual.Return | Drawdown | Sharpe ratio | Volatility |
IVE | 6.75% | -61.61% | 0.39 | 16.25% |
Dashboard List (annual) | 12.68% | -54.67% | 0.69 | 17.35% |
Past performance is not a guarantee of future returns. Data Source: Portfolio123
The Dashboard List beats IVE by 6 percentage points in annualized return. However, the ETF performance is real, whereas the model performance is hypothetical.
Why IVE missed the Value rally
There is not a big difference in complexity between the two strategies, so why is the difference so large? The S&P 500 Value Index has two flaws in my opinion. The first one is to consider valuation ratios are comparable across all sectors. They are not: you can read my latest monthly dashboard here to go a bit deeper into this topic. A consequence is over-weighting financials where valuation ratios are naturally cheaper. It also disadvantages sectors with large intangible assets, especially technology, consumer discretionary and communication. Intangible assets that are not correctly reflected by valuation ratios may come for example from R&D, branding, user databases. The next bar chart shows valuation heterogeneity results in a sector weight discrepancy between IVE and SPY:
The second flaw is using the price/book ratio (P/B), which adds some risk in the strategy. Intuitively, a large group of companies with low P/B should have a higher percentage of value traps than a same-size group with low price/free cash flow. Statistically, such a group will also have a higher volatility and deeper drawdowns in price. 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 and price/free cash flow. The sets are reconstituted annually between 1/1/1999 and 4/20/2021 with elements in equal weight.
Annual.Return | Drawdown | Sharpe ratio | Volatility | |
Cheapest quarter in P/B | 9.61% | -72.62% | 0.46 | 21.32% |
Cheapest quarter in P/FCF | 12.55% | -63.39% | 0.62 | 19.34% |
This explains my choice of using P/FCF and not P/B in the Dashboard List model.
The result of fixing IVE flaws is especially impressive in the last 12 months: the Dashboard List has profited greatly by the coming back of value investing style, while IVE has lagged the broad index.
last 12 months | Annual.Return | Drawdown | Sharpe ratio | Volatility |
SPY | 51.40% | -9.38% | 2.57 | 14.95% |
IVE | 47.14% | -10.03% | 2.13 | 17.01% |
Dashboard List | 72.86% | -14.98% | 3.22 | 14.93% |
Conclusion
IVE follows a systematic strategy based on a ranking system using three valuation metrics. It has been unable to outperform SPY since its inception two decades ago, which is enough to assess the efficiency of a strategy. It is not a bad product: in fact it seems quite equivalent to SPY, with about twice as much in expense ratio. It just doesn’t meet expectations of bringing added value to the broad index. I think there are two flaws in its strategy: it ranks stocks regardless of their sectors, and one of the three metrics is a bad choice. An efficient value model should compare stocks in comparable sets (sector, industry), like I do in the Dashboard List since 2015. My model also uses three valuation metrics, but prefers price/free cash flow to price/book. Moreover, a simple ROE rule helps filter out some value traps and normalize the number of components.
With the coming back of the Value investing style, QRV Dashboard List has beaten the market in the last few months. Members get updates on it and other time-tested strategies, plus risk indicators. Get started with a two-week free trial now.
This article was written by
Fred Piard, PhD. is a quantitative analyst and IT professional with over 30 years of experience working in technology. He is the author of three books and has been investing in data-driven systematic strategies since 2010.
Fred runs the investing group Quantitative Risk & Value where he shares a portfolio invested in quality dividend stocks, and companies at the forefront of tech innovation. Fred also supplies market risk indicators, a real estate strategy, a bond strategy, and an income strategy in closed-end funds. Learn more.Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
long in some constituents of SPY
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