To start 2018, U.S. value strategies have lagged growth alternatives and broader benchmarks as value funds tend to hold less exposure to technology stocks that have climbed higher. However, there are exposure differences in popular value ETFs and mutual funds that help explain the performance distinctions seen in 2018 and in years past. Increasingly, investors are looking at funds using metrics that have historically demonstrated excess market returns over the long term, known as factors. These include positive momentum, smaller size, low value and dividend yield.
iShares Russell 1000 Value (IWD) and iShares S&P 500 Value (VLUE) were down 0.08 percent and down 0.98 percent, respectively year to date through March 14, lagging the 6.3 percent and 7.1 percent gain for the companion iShares Russell 1000 Growth (IWF) and iShares S&P 500 Growth (IVW) ETFs, respectively. Traditional style index-based funds like IWD and IWF are designed to split the market cap of a universe into growth and value, but collectively the two add up to track the parent index. IWD and IVE have $38 billion and $15 billion, respectively, in assets.
In contrast, the $3.5 billion iShares Edge MSCI USA Value Factor (VLUE) and $900 million Guggenheim S&P 500 Value (RPV) seek to replicate narrower value factor indices and deliberately weight stocks by perceived value characteristics including relative price-to-earnings and price-to-book value. Year-to-date, VLUE and RPV were up 2.1 percent and 1 percent, respectively, highlighting that these products are constructed differently than their larger peers.
In January 2018, index provider MSCI launched MSCI FaCS and MSCI Factor box. Mark Carver, head of factor index products-Americas at MSCI, told CFRA that FaCS is designed to provide a common language for factor investing, enabling investors to analyze factor exposures in a portfolio and compare managers side by side in an apples-to-apples framework.
Rob Nestor, head of iShares Smart Beta ETFs, told CFRA at the Inside ETF conference in late January that there’s still an education gap about smart beta. iShares is helping to drive acceptance of Factor Box as a next-generation version of the style box (large-cap value, small- cap growth, etc.) to serve as a platform to support due diligence on funds.
CFRA asked MSCI to put FaCS to the test using year-end data on the four above-mentioned value ETFs as well as three popular actively-managed value mutual funds that garner a high ranking from CFRA’s proprietary holdings-based mutual fund ranking methodology. The mutual funds were Dodge & Cox Stock Fund (DODGX), T Rowe Price Value Fund (TRVLX) and Vanguard Windsor II (VWNAX). Positive scores indicated the fund had high relative exposure to the factor.
As expected, the value factor was positively prevalent in passively-managed IVE (0.30) and IWD (0.27) and was slightly higher than DODGX (0.19), TRVLX (0.23) and VWANX (0.25). However, the value exposure was much stronger at the factor constructed funds RPV (0.83) and VLUE (0.66).
Turning to the yield factor, ETFs IVE (0.28), IWD (0.32), RPV (0.28) and VLUE (0.28) received similar favorable exposure; for mutual funds, TRVLX (0.17) and VWNAX (0.19) also received similar favorable exposure, according to MSCI data. However, DODGX had a slight negative yield factor (-0.11), standing out relative to its peers; DODGX’s 2.1 percent dividend yield is below the Lipper large-cap value peer average of 2.4 percent.
In terms of other factors, we found it very interesting that RPV provided relatively high exposure to the low size factor (0.92 vs. 0.16 for VLUE) and meaningfully negative exposure to the momentum factor (-0.69 vs. -0.05).
A look inside these two value ETFs also provides some insight. RPV’s top-10 holdings include more moderately-sized Archer-Daniels-Midland (ADM) and CenturyLink (CTL) in the consumer staples and telecom services sector. Meanwhile, technology mega-caps Apple (AAPL) and Intel (INTC) are VLUE’s two largest holdings at the end of February. The sector neutral VLUE’s technology exposure (25 percent of assets) is significantly higher than at peers IWD (9.5 percent), IVE (7.5 percent) and RPV (3.5 percent), as the three other ETFs do not follow the same rigid sector rule book.
Among the ETFs listed above, RPV has the highest net expense ratio (0.35 percent), while VLUE has the lowest (0.15 percent). Meanwhile, VWANX’s 0.25 percent fee is considerably lower than TRVLX’s 0.82 percent and the large-cap value mutual fund peer average of 1.01 percent.
All four ETFs and three mutual funds earn a favorable forward-looking CFRA rating due to the attractive valuation or low risk appeal of the underlying holdings. However, we think investors need to understand that all value funds and ETFs are not providing the same exposure and, as such, warrant scrutiny beyond costs.
Todd Rosenbluth is the director of ETF and mutual fund research at CFRA. Learn more about CFRA's ETF research here.