iShares VLUE ETF: Value – Only Way To Approach U.S. Market

The iShares MSCI USA Value Factor ETF (BATS:VLUE) is the value slice of the typical S&P portfolio. It trades at a pretty low multiple and we like quite a lot of the sectoral exposures. Where the broader US market still trades at a high multiple on account of tech, VLUE is looking more reasonable, and the low multiple gives a margin of safety against the probability of earnings declines and higher rates, which despite the manufacturing report may not be reaching their peak. We think that it is one of the much more reasonable US ETFs we’ve seen in a while. Would consider it an attractive proposition even if the jobs report indicates that peak inflation has not yet come.

VLUE Breakdown

VLUE definitely holds what investors would typically consider as value stocks.

Big names here are AT&T (T), Pfizer (PFE) and IBM (IBM) that strike us as particularly value oriented. These companies generally command pretty low multiples and offer nice yields. They are also all fairly resilient. Phone plans and internet are solid markets, the only downside being the immense competition. Same goes for their wireline business. Pfizer is another pretty solid pharma company with blockbuster pneumococcal vaccines, growing oncology portfolio, and of course the COVID-19 vaccine, which is where we believe the most weakness will come. Nonetheless, it’s always been low multiple relative to peers despite prospects. Intel (INTC) is dealing with more problems on the front of competition from Asian fabs and the need to keep up, but it still sells solid products for growing cloud and consumer markets. Also we are entering into a period of semiconductor oversupply soon, so things aren’t looking good on that front either.

Sectorally, the dominant exposure is again IT, as is almost always the case with US ETFs, but these allocations are restricted to asset-heavy, relatively slow moving but resilient companies. IBM now has the Red Hat Linux and other elements of the Red Hat suite for cloud management, and that OS is subscription based and the consulting revenues that go with it are recurring and reliable. CSCO similarly deals with connectivity solutions, and while spending cycles are perhaps not in their best state among customers, 44% of revenue is now on a subscription basis and it can be considered a tech utility.

Otherwise, major exposures are healthcare, and they include many of the world’s best biopharma companies. It’s a very resilient exposure and even benefiting from a modest tailwind from post-COVID recovery in diagnosis rates.

Consumer discretionary is more frightening as it is highly levered to economic cycles. Thankfully, Healthcare and tech already take 40% of the portfolio. The consumer discretionary exposures indeed are primarily car companies or heavy construction. Indeed, all depend heavily and directly on the level of interest rates and the level of consumer confidence. Not good exposures right now.

Remarks

Further down the list, exposures are similarly resilient to some of the top holdings. Financials are solid, industrials are mixed but can be relatively resilient, communication and consumer staples are also solid, as is energy and utilities. The only very weak spot is in consumer discretionary, and the multiple of the ETF properly accounts for that.

The 8.2x PE implies a 12% earnings yield, which is way ahead of the current rate, and even higher rates if today’s job report doesn’t give numbers indicating the coming of peak inflation. The implied growth rates are more than consistent with a medium-term recession.

Value Chart (VTS)

While the yield isn’t massive, a 3.2% is solid, and the earnings yield makes up for it. Overall, there are probably even better positioned ETFs out there, but VLUE does look like a decent way to make a very broad bet on the US market without sticking your neck out too far with the 18x SPY multiple.