SPYV: Still Attractive But Unlikely To Outperform

SPYV: Still Attractive But Unlikely To Outperform

SPYV invests in “cheaper” stocks than funds geared towards the S&P 500. SPYV invests in a subset of S&P 500 stocks with lower pricing ratios.

I like the concept of SPYV, but the SPYV trend is downward over the long term, as compared to funds that track the broader market.

I view SPYV as a probably safer fund than, say, SPY, but I also think that investors pay for the safety in the form of opportunity cost.

SPYV’s current pricing suggests good, positive forward returns, but I am not expecting a reversion to outperformance out of its long-term trend of relative underperformance.

naphtalina/iStock via Getty Images SPDR Portfolio S&P 500 Value ETF (NYSEARCA: SPYV ) is an exchange-traded fund that enables U.S. investors to get exposure to companies that are more cheaply priced relative to the broader market (on average) as approximated by the S&P 500.

In short, SPYV’s mandate is to replicate the performance of the S&P 500 Value Index , which is a subset of the more popular S&P 500 that represents (roughly speaking) the U.S. equity universe’s 500 largest companies. The three ratios used by S&P Dow Jones Indices, in constructing the Value Index, are: the ratios of book value; earnings; and sales to price. Notice in my introduction I referred to SPYV’s purpose in pursuing “more cheaply priced” stocks; this is all “Value” essentially is, when it comes to ETF investing.

Although many will be familiar with the difference between price and value, I will just explain it in brief terms. As the saying goes (attributable to Warren Buffett), “Price is what you pay. Value is what you get.” Price is readily identifiable, whereas (intrinsic) value usually requires deep due diligence. It is not realistically possible to conduct value investing without focusing on single stocks, due to the sheer amount of information that would be required to analyze the intrinsic values of all stocks in an index like the S&P 500. This is why hedge funds often specialize in certain industries or sectors, because of domain-specific knowledge that they can build and apply to their discounted cash flow analyses. Value investing cannot be reduced to three ratios, like SPYV’s benchmark index attempts.

So, talks of “value” in ETF investing are often actually references to “cheap pricing”, and in aggregate, there are usually reasons for cheap prices: low growth, low margins, low returns on equity, high leverage, or some combination of these. Some commodity based companies can trade on low earnings because of uncertain futures (with respect to sales and throughput), low or uncertain margins/operating leverage, low returns on equity (or weak balance sheets), and/or high leverage (which creates instability, often on a cyclical basis; “when the tide goes out”, to borrow from another Buffett saying ).

SPYV therefore better represents a “factor trade”; it selects for companies within the S&P 500 index that are more cheaply priced. The risk is two-fold: on the upside, you are potentially buying into cyclically discounted stocks, whereas on the downside, you are potentially buying into some of the “worst” stocks in the index, in terms of underlying company performance (or perhaps those with the most uncertain futures).

However, perhaps it is not “uncertainty” you are buying, given that historical beta is 1.01x for SPYV relative to the overall market, reflecting essentially no additional volatility or idiosyncratic trepidations. Then again, you would probably expect this given that SPYV has a total of 431 holdings (September 23, 2021), not far off what you would see in a fund tracking the full S&P 500 index. Using SPYV’s most recent benchmark factsheet, the forward price/earnings ratio of 16.97x and its price/book ratio of 2.71x indicates a forward return on equity of about 16%, which is globally strong especially in light of the fact that what SPYV does is exclude some very high-ROE stocks in the tech sector that have been excluded on generous pricing grounds. ( S&P Dow Jones Indices )

The top 10 constituents of SPYV’s index are more traditional companies, including holding companies and financials companies. You do not see companies like Apple ( AAPL ) and Microsoft ( MSFT ), for instance. While overall sector exposures are quite balanced (more so than the more tech-heavy S&P 500), with a particular focus on Financials (21%), Health Care (15%), Industrials (12%), but still with a Technology exposure of 11%. Apparently, judging from the trailing and forward price/earnings ratios of SPYV (as estimated by the August 31, 2021 benchmark index factsheet for the fund), of 28.27x and 16.97x, […]

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