IJS: Small Cap Value Review

Summary

  • Strategy and portfolio characteristics.
  • Past performance.
  • Pros and cons.
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Small Cap escribir en notas adhesivas aisladas en Office Desk. Concepto de mercado de valores
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IJS strategy

The iShares S&P Small-Cap 600 Value ETF (NYSEARCA:IJS) has been tracking the S&P SmallCap 600 Value Index since July 2000. Its distribution yield is 0.87% and its total expense ratio is 0.18%. It is a direct competitor of the SPDR S&P 600 Small Cap Value ETF (SLYV), which tracks the same underlying index and has a similar expense ratio (0.15%).

As described by S&P Dow Jones Indices, S&P 600 constituents are ranked in Value and Growth styles using 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 the parent index constituents exclusively belongs to each style, and 34% belongs to both styles. The Value subset serves as S&P 600 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.

As expected, aggregate valuation ratios of IJS are lower than for the iShares Core S&P Small-Cap ETF (IJR), which tracks the S&P SmallCap 600 and may be used as a benchmark:

IJS

IJR

Price/Earnings TTM

15.04

17.66

Price/Book

1.68

2.22

Price/Sales

1.03

1.28

Price/Cash Flow

8.41

10.55

Source: Fidelity

Portfolio

IJS currently holds about 530 stocks. The top 15 holdings represent about 10% of the portfolio value. The next table lists their weights and basic ratios. The largest one weighs about 1%, so the risk related to any individual stock is low.

Ticker

Name

Weight%

EPS growth% ttm

P/E ttm

P/E fwd

Yield%

M

Macy's Inc.

1.05

91.64

N/A

8.19

0.00

REZI

Resideo Technologies Inc.

0.83

321.15

18.11

19.48

0.00

BKU

BankUnited Inc.

0.72

74.98

11.27

11.04

2.17

PDCE

PDC Energy Inc.

0.7

81.48

N/A

6.29

1.24

ABG

Asbury Automotive Group Inc.

0.69

170.90

8.81

8.14

0.00

PPBI

Pacific Premier Bancorp Inc.

0.69

698.68

12.69

12.04

3.30

FHB

First Hawaiian Inc.

0.67

36.29

13.63

13.87

3.66

ABCB

Ameris Bancorp

0.64

215.83

8.23

9.72

1.20

NSIT

Insight Enterprises Inc.

0.63

26.77

18.27

14.36

0.00

SIG

Signet Jewelers Ltd.

0.6

264.05

14.47

8.90

1.14

ISBC

Investors Bancorp Inc.

0.58

67.25

11.63

11.33

3.91

ABM

ABM Industries Inc.

0.57

968.92

14.77

13.84

1.62

AGO

Assured Guaranty Ltd.

0.57

18.18

11.39

15.79

1.81

SFNC

Simmons First National Corp.

0.57

-5.92

12.14

12.68

2.47

HP

Helmerich & Payne Inc.

0.54

22.22

N/A

N/A

3.61

Ratios: Portfolio123

The S&P SmallCap 600 Value Index considers valuation metrics are comparable across all sectors. I think they are not: my monthly dashboard here illustrates this topic. A consequence is over-weighting financials where valuation ratios are naturally cheaper. It also disadvantages technology and healthcare. The next chart shows weight discrepancies between IJS and IJR.

Historical performance

Since inception (07/24/2000), IJS is very close to the parent index in performance and risk metrics.

Since July 2000

Annual Return

Drawdown

Sharpe ratio

Volatility

IJS

10.41%

-60.11%

0.52

20.31%

IJR

10.55%

-58.15%

0.54

19.29%

Data calculated with Portfolio123

Comparison 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 IJS underlying index since inception with the Dashboard List model, with a tweak: the list is reconstituted annually instead of once a month to make it comparable to a passive index.

Since July 2000

Annual Return

Drawdown

Sharpe ratio

Volatility

IJS

10.41%

-60.11%

0.52

20.31%

Dashboard List (annual)

12.92%

-58.10%

0.7

17.52%

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

The Dashboard List outperforms the S&P 600 Value Index by 2.5 percentage points in annualized return and has slightly better risk metrics (drawdown and volatility). However, IJS price history is real and the model performance is hypothetical.

Price to Book: a risky concept of value

Mixing various ratios to rank value stocks makes sense. Among them, the price/book ratio (P/B) is the historical value factor of the Fama-French three-factor model. However, statistics in the last two decades show that it may add some risk in the strategy. A large portfolio of companies with low P/B is likely to hold a higher percentage of value traps than a same-size group with low price/free cash flow. It is also likely to show higher volatility and deeper drawdowns. 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 1/1/1999 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/E

11.13%

-65.11%

0.56

19.15%

Cheapest quarter in P/S

12.41%

-65.66%

0.59

20.70%

Cheapest quarter in P/FCF

12.55%

-63.39%

0.62

19.34%

Data calculated with Portfolio123

This explains my choice of using P/E, P/S, P/FCF, but not P/B in the Dashboard List model.

Conclusion

IJS uses several metrics to select value stocks in the S&P SmallCap 600 index and weight them. It has been unable to outperform its parent index in 21 years. IJS is not a bad product: it seems quite equivalent to the broader small cap ETF IJR on the long term. It may be part of a tactical allocation strategy switching between value and growth depending on market conditions. However, it doesn’t meet expectations of bringing added value to the small cap benchmark. I think it has two shortcomings: ranking stocks regardless of their sectors, and using a risky valuation ratio (P/B). An efficient value model should compare stocks in comparable sets (sector, industry), like I do in the Dashboard List since 2015. This model also uses three valuation metrics, excluding price/book.

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 profile picture
14.45K Followers
Data-driven portfolios and risk indicators.
Author of Quantitative Risk & Value and three books, I have been investing in systematic strategies since 2010. I have a PhD in computer science, an MSc in software engineering, an MSc in civil engineering and 30 years of professional experience in various sectors. My aim is making simple and efficient quantitative investing techniques available to my followers. Quantitative models can make investment decisions faster, reproducible and emotionless by focusing on relevant information in the middle of market noise. Moreover, models can be refined to meet specific risk tolerance and objectives. 

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I am an individual investor and an IT professional, not a finance professional. My writings are data analysis and opinions, not investment advice. They may contain inaccurate information, despite all the effort I put in them. Readers are responsible for all consequences of using information included in my work, and are encouraged to do their own research from various sources.

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.

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