IVV: S&P 500 Dashboard For August

Summary

• A dashboard with metrics of value, quality and momentum in all sectors.
• Value and quality scores relative to historical averages.
• Evolution since last month.
• Looking for a helping hand in the market? Members of Quantitative Risk & Value get exclusive ideas and guidance to navigate any climate. Learn More »

anyaberkut/iStock via Getty Images

This monthly dashboard series reports sector metrics in the S&P 500 index. It is also a top-down analysis of all ETFs following this index. Among them, the iShares Core S&P 500 ETF (NYSEARCA:IVV) is the second most popular behind SPY regarding assets under management and average daily volume. It is also cheaper in management cost, with a 0.03% expense ratio vs. 0.09% for SPY.

Shortcut

The next two paragraphs in italic describe the dashboard methodology. They are necessary for new readers to understand the metrics. If you are used to this series or if you are short of time, you can skip them and go to the charts.

Base Metrics

I calculate the median value of five fundamental ratios in every sector: Earnings Yield ("EY"), Sales Yield ("SY"), Free Cash Flow Yield ("FY"), Return on Equity ("ROE"), Gross Margin ("GM"). All are calculated on trailing 12 months. For all these ratios, higher is better and negative is bad. EY, SY and FY are medians of the inverse of Price/Earnings, Price/Sales and Price/Free Cash Flow. They are better for statistical studies than price-to-something ratios, which are unusable when the "something" is close to zero or negative (for example, companies with negative earnings). I also calculate two momentum metrics for each group: the median monthly return (RetM) and the median annual return (RetY).

I prefer medians rather than averages because a median splits a set in a good half and a bad half. Capital-weighted averages are skewed by extreme values and the largest companies. As a consequence, these metrics are designed for stock-picking rather than index investing.

Value and Quality Scores

Historical baselines are calculated as the averages on a look-back period of 11 years for all metrics. They are noted respectively EYh, SYh, FYh, ROEh, GMh. For example, the value of EYh for technology in the table below is the 11-year average of the median Earnings Yield of S&P 500 tech companies.

The Value Score "VS" is the average difference in % between the three valuation ratios (EY, SY, FY) and their baselines (EYh, SYh, FYh). The same way, the Quality Score "QS" is the average difference between the two quality ratios (ROE, GM) and their baselines (ROEh, GMh).

VS may be interpreted as the percentage of undervaluation or overvaluation relative to the baseline (positive is good, negative is bad). This interpretation must be taken with caution: the baseline is an arbitrary reference, not a supposed fair value. The formula assumes that the three valuation metrics are of equal importance, except in energy and utilities where the Free Cash Flow Yield is ignored to avoid some inconsistencies. A floor of -100 is set for VS and QS when the calculation goes below this value. It may happen when metrics in a sector are very bad.

Current data

The next table shows the metrics and scores as of last week’s closing. Columns stand for all the data defined above.

	VS	QS	EY	SY	FY	ROE	GM	EYh	SYh	FYh	ROEh	GMh	RetM	RetY
All	-29.78	8.55	0.0327	0.2901	0.0259	16.28	47.66	0.0468	0.4827	0.0321	14.49	45.48	1.43%	40.86%
Cs. Discretionary	-32.58	-5.16	0.0306	0.3726	0.0297	19.40	34.48	0.0481	0.7088	0.0345	20.27	36.69	0.36%	46.02%
Cs. Staples	-7.61	4.24	0.0399	0.4561	0.0260	26.48	38.94	0.0465	0.5271	0.0248	23.18	41.33	-1.48%	20.86%
Energy	-69.40	-83.79	-0.0048	0.4751	0.0158	-2.71	36.73	0.0181	0.5416	-0.0193	4.90	41.85	-10.24%	50.34%
Financials	-19.51	20.04	0.0723	0.3525	0.0464	13.46	76.52	0.0662	0.4907	0.0768	10.07	71.94	-0.55%	52.78%
Healthcare	-37.15	7.10	0.0264	0.1904	0.0256	18.26	63.33	0.0401	0.3261	0.0398	16.26	62.14	4.82%	30.73%
Industrials	-37.99	9.16	0.0295	0.2834	0.0253	23.15	37.08	0.0487	0.6244	0.0316	19.68	36.82	3.27%	49.05%
Technology	-41.66	20.48	0.0254	0.1498	0.0264	26.92	64.78	0.0421	0.3077	0.0400	19.70	62.12	4.55%	47.17%
Communication	-36.42	-17.63	0.0217	0.2875	0.0400	10.94	53.79	0.0503	0.5490	0.0420	16.37	54.93	-2.03%	39.02%
Materials	-1.65	3.45	0.0405	0.4163	0.0367	15.59	39.31	0.0448	0.6501	0.0261	16.17	35.57	-0.26%	52.94%
Utilities	-31.67	13.55	0.0422	0.3569	-0.0667	10.63	45.33	0.0541	0.6085	-0.0423	9.75	38.38	4.00%	8.79%
Real Estate	-25.27	11.79	0.0164	0.0771	0.0054	6.78	67.19	0.0195	0.1204	0.0071	5.61	65.41	4.69%	53.74%

Click to enlarge

Score charts

The next chart plots the Value and Quality Scores by sectors (higher is better).

Chart: author; data: Portfolio123

Score variation since last month:

Chart: author; data: Portfolio123

The next chart plots momentum data.

Chart: author; data: Portfolio123

Interpretation

A hypothetical S&P 500 “median” company is overvalued by about 30% relative to average valuation metrics since 2010. The quality score is 8.55% above the baseline. We can translate median yields in their inverse ratios:

Price/Earnings: 30.58 - Price/Sales: 3.45 - Price/Free Cash Flow: 38.61

They have improved since last month.

Materials and consumer staples are close to their historical baselines in both value and quality. Other sectors except energy are overvalued by 19% to 42%. Technology and financials may partly justify overvaluation by excellent quality scores. Valuation and quality metrics in energy have improved a lot in the last two months, but most S&P 500 companies in this sector are still unprofitable on a trailing year basis: their median earnings yield (EY) and return on equity (ROE) are below zero. Combining value, quality and momentum, basic materials look the most attractive GICS sector as of writing.

The S&P 500 (IVV, SPY) has gained 34% in 12 months, but the momentum measured in median return is 40.9% and the equal-weight average is 42.7% (measured on RSP). It means the recovery after the 2020 meltdown was not driven by large tech companies. In fact, it was better in lower-size market segments. On the same period, the mid-cap index (MDY) gained 44.5% and the Russell 2000 (IWM) 49.3%.

We use the table above to calculate value and quality scores. It may also be used in a stock-picking process to check how companies stand among their peers. For example, the EY column tells that a large consumer staples company with an Earnings Yield above 0.0399 (or price/earnings below 25.06) is in the better half of the sector regarding this metric. A Dashboard List is sent every month to Quantitative Risk & Value subscribers with the most profitable companies standing in the better half among their peers regarding the three valuation metrics at the same time.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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 several constituents of IVV

Comments

[SeekingTruth]

As you have reported, those valuations are for "median " companies.
So UP days like today never cease to amaze me, even with some good news.

People buying with blinders on, when they take them off, if ever, they will be concerned with what they see - maybe.

Always good and usually sobering work, Thanks again.

[Mr. Polymath]

Thanks for the information. I always appreciate it.

[Fred Piard]

@incatrading Thanks for following my work.