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What’s In Store for Value Indexed ETFs?

We think these value indexed funds’ performance relative to active funds is the result of investment decisions made by active managers, not the ETFs.

The recently released SPIVA Scorecard from S&P Dow Jones Indices reports—once again—that passive funds outperform those that are actively managed. For instance, just 20 percent of actively managed, large-cap value mutual funds outperformed the S&P 500 Value Index in the three-year period from 2015 to 2017. On an equal-weighted basis the average large-cap value fund lagged by 160 basis points. Fees played a role, of course, with the average large-cap value mutual fund in CFRA Research’s database charging 102 basis points; ETF investors can get exposure to the S&P 500 Value Index for a fraction of that.

For instance, the SPDR Portfolio S&P 500 Value (SPYV), one of the three ETFs tracking this index, costs 4 basis points. That’s 11 basis points cheaper than Vanguard S&P 500 Value (VOOV) and 14 basis points less than iShares S&P 500 Value (IVE). While advisors often give a price tag too much consideration when comparing ETFs, in the case of large index funds with low tracking error, it makes a difference. 

With passively managed ETFs, sometimes investors focus too much on how well a fund tracks a benchmark and the fund’s past performance record. But according to data on ETF.com, SPYV has a 12-month median track difference of -0.18 percent, in line with IVE and 1 basis point wider than VOOV. We think these index funds’ performance record relative to active funds is the result of investment decisions made by the active funds, not the ETF manager. CFRA thinks what’s going to drive a fund like SPYV in 2018 and beyond are its holdings.

Rather than relying solely on past performance, CFRA rates more than 1,300 ETFs based primarily on a combination of holdings analysis and cost factors. Overall, SPYV, the cheapest of the lot, is appealing based on the CFRA STARS and the Qualitative Risk Assessment of its holdings.

Let’s look inside the fund: Our Investment Policy Committee thinks large-cap share prices will be propelled by organic economic growth, tax reform, share repurchases and a soft U.S. dollar. Yet there is an anticipation of continued elevated volatility anticipated because of uncertainties surrounding global trade tensions and the November mid-term elections.

CFRA has a Buy recommendation on JPMorgan Chase, SPYV’s largest holding at the end of February. CFRA Equity Analyst Ken Leon views JPMorgan Chase as well positioned to benefit from The Tax Cut and Jobs Act for its customers, expected higher interest rates and an improved macroeconomic environment. Leon believes the loan-to-deposit ratio should improve for the company with customer demand in both consumer and commercial lending. Meanwhile, he expects widening interest rate spreads to spur higher net interest income growth.

Meanwhile, CFRA Equity Analyst Christopher Muir has a Strong Buy recommendation on top-10 holding DowDupont. Muir sees merger savings driving EPS growth, yet also expects the proposed breakup into three companies unlocking value for shareholders. Muir expects 2018 sales growth of 5.1 percent and has a favorable view of the company’s $4 billion share repurchase program.

Another CFRA Buy recommended position is Johnson & Johnson. Jeffrey Loo, an equity analyst with CFRA, views it as uniquely situated with unmatched depth and breadth in growing global health care markets, and with solid positions in drugs, medical devices and consumer products. Loo thinks the stock deserves to trade at a slight premium P/E to peers, to its strong pipeline, and improving sales in consumer and medical device units.

Other large holdings viewed as attractively valued by CFRA’s equity analytical team include AT&T, Bank of America and Walmart.

The S&P 500 Value Index is constructed by looking at the value factor scores for the S&P 500 constituents on an annual basis. The scores are based on book value-to-price, earnings-to-price and sales-to-price ratios. Unlike some value-oriented ETFs, such as iShares Edge MSCI USA Value Factor (VLUE) that is sector neutral, the market-cap weighted SPYV deviates from its parent index.

At the end of February, financials (26 percent of assets vs. 14 percent for the S&P 500 Index), energy (11 percent vs. 5 percent) and consumer staples (11 percent vs. 8 percent) were heavily weighted, while information technology (7 percent vs. 24 percent), consumer discretionary (9 percent vs. 13 percent) and healthcare (10 percent vs. 14 percent) stocks were less represented. 

In addition to looking at holdings and costs, CFRA also conducts technical analysis on ETFs. SPYV trades with bullish tendencies relative to its 200-day moving average.

Since its expense ratio reduction in mid-October and addition to a commission-free platform, SPYV has pulled in more than $1 billion of new money. Meanwhile, its average daily trading volume has doubled to approximately 700,000 shares.

CFRA thinks all investors seeking large-cap value exposure should look closely at this low-cost offering. What’s inside, as well as SPYV’s narrow expense ratio, is compelling to us.

Todd Rosenbluth is the director of exchange traded and mutual fund research at CFRA. Learn more about CFRA's ETF research here.

 

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