VIOV: Not The Best ETF To Bet On Value (NYSEARCA:VIOV)

This text sequence goals at evaluating ETFs (exchange-traded funds) relating to the relative previous efficiency of their methods and metrics of their present portfolios. Opinions with up to date knowledge are posted when mandatory.

VIOV technique and portfolio

Vanguard S&P Small-Cap 600 Worth Index Fund (NYSEARCA:VIOV) has been monitoring the S&P SmallCap 600 Worth Index since September 2010. It has 456 holdings, a 12-month trailing yield of 1.8% and a complete expense ratio of 0.15%. It’s a direct competitor of SPDR S&P 600 Small Cap Worth ETF (SLYV) and iShares S&P Small Cap 600 Worth ETF (IJS), which observe the identical underlying index and have related expense ratios. SLYV and IJS are older: they had been launched in 2000. They’re additionally extra liquid and have extra belongings below administration.

As described within the prospectus by S&P Dow Jones Indices, S&P 600 constituents are ranked in worth and progress types utilizing three valuation ratios and three progress metrics. The valuation ratios are e-book worth to cost, earnings to cost and gross sales to cost. By development, 33% of the guardian index constituents solely belongs to every fashion, and 34% belongs to each types. The Worth subset serves as S&P 600 Worth Index and is rebalanced yearly. It’s capital-weighted, with an adjustment for constituents belonging to each types. For instance, an organization with a price rank higher than its progress rank is given a bigger weight within the Worth Index than within the Development Index.

The following desk compares valuation ratios of VIOV, its guardian index S&P SmallCap 600 represented by iShares Core S&P Small-Cap ETF (IJR), and a competitor with a unique underlying index: iShares Russell 2000 Worth ETF (IWN). As anticipated, VIOV is cheaper than its guardian index, however the distinction will not be spectacular. The comparability with the Russell 2000 Worth Index is combined: VIOV is cheaper relating to worth/gross sales, considerably dearer in worth/earnings, and tie in worth/e-book and worth/money movement.

Click on to enlarge

Supply: Constancy

The heaviest sectors are shopper discretionary (19.7%), financials (18%), industrials (15.9%) and actual property (11.1%). Different sectors are under 9%. In comparison with the S&P 600 index, VIOV considerably overweights shopper discretionary and actual property. It underweights principally know-how and healthcare.

The portfolio is well-diversified: the highest 10 holdings signify solely 8% of asset worth. The following desk lists them with their weights and valuation ratios. The heaviest one weighs about 1%, so dangers associated to particular person firms are low.

Click on to enlarge

Ratios: Portfolio123

Bear in mind VIOV and IJS have the identical underlying index. Since VIOV inception (09/07/2010), they’ve related annualized returns (10.91% vs 10.82%). I’ll use IJS to evaluate the underlying index on an extended interval.

Since 08/1/2000, the S&P 600 Worth Index may be very near the broader S&P 600 in efficiency and threat metrics.

Click on to enlarge

Knowledge calculated with Portfolio123

The following chart compares the 12-month whole returns of VIOV and 4 different small cap worth funds:

• Vanguard Small Cap Worth ETF (VBR), reviewed right here
• iShares Russell 2000 Worth ETF (IWN), reviewed right here
• Avantis U.S. Small Cap Worth ETF (AVUV), reviewed right here
• Dimensional US Small Cap Worth ETF (DFSV)

AVUV and DFSV are actively managed, whereas VBR and IWN observe completely different indexes.

VIOV is second to final and virtually tie to AVUV. Nonetheless, all funds are in a good vary.

Comparison with my Dashboard Record mannequin

The Dashboard Record is a listing of 60 to 80 shares within the S&P 1500 index, up to date each month primarily based on a easy quantitative methodology. All shares within the Dashboard Record are cheaper than their respective business median in Value/Earnings, Value/Gross sales and Value/Free Money Stream. An exception in utilities: the Value/Free Money Stream will not be taken under consideration to keep away from some inconsistencies. Then, the ten eligible firms with the best Return on Fairness in each sector are saved within the listing. Some sectors are grouped collectively: power with supplies, communication with know-how. Actual property is excluded as a result of these valuation metrics do not work nicely on this sector. I’ve been updating the Dashboard Record each month on Looking for Alpha since December 2015, first in free-access articles, then in Quantitative Danger & Worth.

The following desk compares VIOV underlying index since 8/1/2000 with the Dashboard Record mannequin, with a tweak: right here, the listing is reconstituted annually to make it comparable with a passive index.

Click on to enlarge

Previous efficiency will not be a assure of future returns. Knowledge Supply: Portfolio123

The Dashboard Record outperforms the S&P 600 Worth Index by 2.5% in annualized return and has barely higher threat metrics (drawdown and volatility). A notice of warning: IJS worth historical past is actual, whereas the mannequin simulation is hypothetical.

Two weaknesses of worth indexes

I like the thought of blending varied ratios to rank worth shares. Nonetheless, I feel most worth indexes doing so have two weaknesses, and IJS no exception. The primary one is to categorise all shares on the identical standards. It means the valuation ratios are thought-about comparable throughout sectors. Clearly, they aren’t: my month-to-month dashboard right here exhibits how valuation and high quality metrics could fluctuate throughout sectors.

The second weak point comes from the value/e-book ratio (P/B), which provides some threat within the technique. Historic knowledge present that a big group of firms with low P/B has the next chance to carry worth traps than a same-size group with low worth/earnings, worth/gross sales or worth/free money movement. Statistically, such a gaggle exhibits the next volatility and deeper drawdowns. The following desk exhibits the return and threat metrics of the most cost effective quarter of the S&P 500 (i.e.125 shares) measured in worth/e-book, worth/earnings, worth/gross sales and worth/free money movement. The units are reconstituted yearly between 1/1/2000 and 1/1/2023 with components in equal weight.

Click on to enlarge

Knowledge calculated with Portfolio123

This explains why I exploit P/FCF and never P/B within the Dashboard Record mannequin.

Takeaway

Vanguard S&P SmallCap 600 Worth ETF holds over 400 small caps chosen and weighted primarily based on worth and progress metrics. It’s well-diversified throughout sectors and holdings. VIOV, IJS and SLYV have the identical underlying index and they’re equivalents for long-term traders. Nonetheless, IJS and SLYV are higher for tactical asset allocation and buying and selling functions, as a result of they’ve larger buying and selling volumes. Efficiency and threat metrics since 2000 are very near the guardian index S&P SmallCap 600. VIOV combines two of the three components of the unique Fama-French mannequin: worth and measurement. Nonetheless, the technique has did not deliver extra return over its guardian index on the long run. Like most worth indexes, it has two weaknesses: rating shares no matter their industries, and relying an excessive amount of on the value/e-book ratio.