IVE: Resisting Bear Attacks (NYSEARCA:IVE)

This article belongs to a series aiming at evaluating ETFs regarding their strategies, portfolio metrics, and past performance. As holdings and weights change over time, updates are posted when necessary.

IVE strategy and portfolio

The iShares S&P 500 Value ETF (NYSEARCA:IVE) has been tracking the S&P 500 Value Index since May 2000. IVE has 445 holdings, a distribution yield of 2.07%, and a total expense ratio of 0.18%.

As described by S&P Global, the underlying index selects companies in the S&P 500 index exhibiting the strongest value score based on three ratios: book value to price, earnings to price, and sales to price. It is weighted by market capitalization and rebalanced annually. According to the prospectus, the underlying index represented about half of the market capitalization of the S&P 500 index (SPY).

IVE invests almost exclusively in U.S. companies (98.7% of asset value), mostly in the large-cap segment (78.8%). As expected, IVE is cheaper than its parent index regarding the usual valuation ratios (reported in the next table).

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The top three sectors are healthcare (17.2%), financials (15.2%), and industrials (12.6%). Compared to the S&P 500, the fund underweights technology, consumer discretionary, communication and overweights all other sectors. This results in a more harmonious sector breakdown.

The top 10 holdings listed below with valuation ratios represent 19% of asset value. The heaviest position weights 3.17%, so risks related to individual stocks are low.

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Since inception in May 2000, IVE has slightly underperformed SPY. However, the difference in annualized return is insignificant (17 bps). The risk measured in maximum drawdown and volatility (standard deviation of monthly returns) is a bit higher.

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Data calculated with Portfolio123

The two funds have alternatively outperformed each other. IVE has lagged from 2018 to 2021.

In 2022, IVE beats SPY by about 12 percentage points (see next chart). It also beats some competitors (SCHV, JVAL), but lags the Avantis U.S. Large Cap Value ETF (AVLV) by a short margin. It is on par with the Vanguard S&P 500 Value Index Fund (VOOV), which tracks the same index.

Comparing IVE with my value benchmark

The Dashboard List is a list of 60 to 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. An exception in Utilities: the Price/Free Cash Flow is not taken into account to avoid some inconsistencies. Then, the 10 eligible 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 IVE performance since inception with the Dashboard List model, with a tweak: here, the list is reconstituted once a year to make it comparable with a passive index.

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

The Dashboard List beats IVE by a wide margin in return and risk-adjusted performance (Sharpe ratio), with a note of caution: ETF performance is real, whereas the list is simulated.

Fundamental shortcomings

Most value indexes have two shortcomings in my opinion, and IWN is no exception. The first one is to classify all stocks on the same criteria. It means the valuation ratios are considered comparable across sectors. Obviously, they are not: you can read my monthly dashboard here for more details about this topic. A consequence is to privilege sectors where valuation ratios are naturally cheaper, especially financials. Some other sectors are disadvantaged: those with large intangible assets like technology. To make things simple, companies with large intangible assets are those with a business model based on massive R&D, or strong branding, or large user databases, or operating in a field where competition is limited by an expensive entry ticket. All these elements are not correctly reflected by valuation ratios.

The second flaw is using the price/book ratio (P/B), which adds some risk in the strategy. Intuitively, a large group of companies with low P/B contains a higher percentage of value traps than a same-size group with low price/earnings, price/sales, or price/free cash flow. Statistically, such a group has 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 1/1/2022 with elements in equal weight.

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Data calculated with Portfolio123

This explains my choice of using P/FCF and not P/B in the Dashboard List model.

Takeaway

IVE tracks the S&P 500 Value Index, which represents about half of the S&P 500’s capitalization. This index is based on a ranking system using three valuation ratios. It is better balanced across sectors than the S&P 500. The heaviest ones are healthcare and financials. It has failed to outperform SPY since its inception two decades ago. It has alternatively beaten and lagged SPY, which means it may be useful in a tactical allocation strategy switching between value and growth. However, as a buy-and-hold investment, it doesn’t seem to add value to the broad index. I think there are two shortcomings in its strategy: it ranks stocks regardless of their sectors, and one of the three metrics adds some risk. An efficient value model should compare stocks in comparable sets (sector, industry), like I do in the Dashboard List. My model also uses three valuation metrics but prefers price/free cash flow to price/book.