Seeking Alpha

SA #18: RPV – ‘Pure Value’ Is Indeed More Value Than ‘Value’

RPV: 'Pure Value' Is Indeed More Value Than 'Value'
April 08, 2023

Summary

  • Systematic value investors bet that a diversified portfolio of fundamentally “cheap” stocks should outperform a portfolio of “expensive” stocks over the long term.
  • The Invesco S&P 500 Pure Value ETF tracks the S&P 500 Pure Value Index and was incepted in March 2006.
  • Compared to other “smart-beta” value ETFs, RPV is a more aggressive value-strategy and only invests in the top 20% value stocks of the S&P 500 universe (currently 82 positions).
  • With this methodology and three fundamental valuation ratios as value signals, the investment process underlying RPV incorporates several best-practices from the academic literature on the value-factor.
  • RPV is well positioned in a value-peer group and (in my opinion) a very good instrument for investors seeking concentrated exposure to the value-factor.


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SA #17: IUSV – Transparent Value With Modest Active Risk

IUSV: Transparent Value With Modest Active Risk
March 29, 2023

Summary

  • The general idea behind the value factor is that a diversified portfolio of fundamentally cheap stocks should outperform over the long term.
  • Since January 2017, the iShares Core S&P U.S. Value ETF has tracked the S&P 900 Value Index and provides transparent exposure to the well-researched value premium.
  • S&P uses three well-known fundamental valuation ratios to identify and overweight “cheap” value stocks with respect to the overall market index.
  • Relying on multiple value signals is in line with the research consensus of the literature on the value factor and differentiates IUSV from some competitors.
  • Despite the recent value drawdown, IUSV kept up with a peer group and should be a reasonable instrument for investors who want to have U.S. large-cap value exposure at modest active risk.


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SA #16: IWD – Low Growth Is Not Necessarily Value – Also For Large Caps

IWD: Low Growth Is Not Necessarily Value – Also For Large Caps
March 27, 2023

Summary

  • There are countless methods and nuances of (systematic) value investing, but the general idea remains “cheap beats expensive”. Not always, but on average over the long run.
  • The iShares Russell 1000 Value ETF tracks the Russell 1000 Value Index and offers a simple, transparent, and cheap implementation of the value premium for US large caps.
  • The Russell value process unfortunately equates “low sales growth” with “value” which contradicts with the best practices discussed in the literature on the value factor.
  • Despite decent performance when compared to an investable value peer-group, IWD is therefore not my preferred value implementation.


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SA #15: VLUE – Transparent Value With Little Industry Bets

VLUE: Transparent Value With Little Industry Bets
February 28, 2023

Summary

  • The core idea of value investing remains unchanged since its introduction by Graham and Dodd in the 1930s: fundamentally cheap stocks tend to beat expensive stocks on average.
  • The iShares Edge MSCI USA Value Factor ETF tracks the MSCI USA Enhanced Value Index and provides cheap, efficient, and transparent systematic value exposure among US large caps.
  • Importantly, the underlying value index incorporates several insights of the literature on the value factor (multiple value signals, value-rankings within sectors, and no unintended industry bets).
  • For investors who want US value exposure without running into unintended sector bets and without taking too much active risk, VLUE is an interesting instrument.


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SA #14: IWN – Low Growth Is Not Necessarily Value

IWN: Low Growth Is Not Necessarily Value
February 28, 2023

Summary

  • Systematic value investing is the idea that fundamentally cheap stocks tend to outperform expensive stocks over the long term on average.
  • The iShares Russell 2000 Value ETF tracks the Russell 2000 Value Index and offers a simple, transparent, and cheap implementation of the value premium for US small caps.
  • Unfortunately, the index equates “value” with “low sales growth” and therefore contradicts with well-known results of the academic and practitioner literature on the value factor.
  • Despite decent performance since inception in 2000 and over the last years, IWN is therefore not my preferred value instrument.


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SA #13: QVAL – A Close Look At The Methodology

QVAL: A Close Look At The Methodology
February 20, 2023

Summary

  • Value investing is one of the oldest investment styles, and the original idea remains unchanged: cheap stocks tend to outperform expensive stocks on average.
  • Despite weak performance from 2018 until recently, the underlying drivers of the value premium remain still valid and the factor enjoyed a comeback since late 2020.
  • The Alpha Architect U.S. Quantitative Value ETF couldn’t detach itself from the difficult value-period and has massively underperformed the S&P 500 benchmark since its inception in October 2014.
  • QVAL also had problems within the value world. The ETF underperformed two simple academic value benchmarks from Kenneth French’s website, and 7 other well-known value peers.
  • Some of the underperformance could come from the fact that Alpha Architect does not consider more recent academic insights on value investing in some parts of their process.


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SA #12: VOO – Global Revenues And Global Diversification Are Not The Same

VOO: Global Revenues And Global Diversification Are Not The Same
February 07, 2023

Summary

  • In 2017, about 29% of S&P 500 revenues came from overseas. This fraction increased to about 40% by the end of 2022.
  • Some investors argue that this global exposure is a substitute for true international diversification, i.e., that it is not required to invest in non-US stocks.
  • Global revenues certainly help to stabilize the fundamentals and stock prices of the underlying companies, but they are unlikely to save your portfolio from bets on the wrong country/region.
  • A counterexample from European stock markets shows that true global diversification was much better to escape the region’s underperformance than overweighting European companies with a higher share of global revenues.
  • That said, the Vanguard S&P 500 ETF (VOO) remains an outstanding instrument to track the S&P 500 Index. But despite global revenues of the underlying firms, it remains a bet on US large caps.


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SA #11: QMOM – Second-Best In The Momentum Crash of January 2023

QMOM: Second-Best In The Momentum Crash Of January 2023
February 06, 2023

Summary

  • January 2023 was brutal for momentum because many of last year’s losers suddenly outperformed – a momentum crash par excellence.
  • The Dow Jones US Market Neutral Momentum Index, a simple and transparent implementation of the long-short momentum factor, lost 19% YTD (as of February 3, 2023).
  • Most of the losses came from the short-side. The Dow Jones US Low Momentum Index, the portfolio of past losers, returned 25.68% YTD.
  • The Alpha Architect U.S. Quantitative Momentum ETF returned -0.83% YTD and underperformed the US market by >10% points. Although painful, this is still second-best in a peer-group of other momentum ETFs.
  • This speaks for the differentiated momentum process of Alpha Architect. Nobody likes bad months, but momentum crashes are actually a plausible reason why momentum worked historically and probably continues to do so in the future.


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SA #10: ACWI Vs. VT – Vanguard Wins Again

ACWI Vs. VT: Vanguard Wins Again
January 30, 2023

Summary

  • In this article, I focus on the iShares MSCI ACWI ETF (ACWI) and how it compares to the Vanguard Total World Stock ETF (VT).
  • For the longest common period since June 2008, ACWI currently lags VT by about 14%-points or 41 basis points per year.
  • The performance gap mostly comes from different underlying indices. VT tracks an index with >9,400 stocks whereas ACWI ignores small caps and “only” holds about 2,800 positions.
  • ACWI is thus farther away from the academic idea of truly passive investing (holding a market-cap weighted portfolio of all investable stocks).
  • ACWI also comes with higher fees (0.32% TER vs. 0.07% for VT). For investors who seek passive exposure to global stock markets, VT therefore seems the better choice.


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SA #9: VT – As Passive As Practically Possible

VT: As Passive As Practically Possible
January 29, 2023

Summary

  • The Vanguard Total World Stock ETF is one of the leading ETFs to invest truly passively in global stock markets.
  • Passive investing means holding the market portfolio. Applied to equities, this is the market-cap weighted portfolio of all available stocks in the world. By definition, this goes beyond the US.
  • Since 2008, the US market has a tracking error of 6.6% compared to VT. The active share currently stands at 41% which makes a pure-US portfolio a quite active strategy.
  • Historically, active bets on the US were well rewarded. But it’s unclear if this pattern continues. The case for passive investing and global diversification is therefore as strong as ever.
  • VT tracks the FTSE Global All Cap Index and holds 9,473 stocks from 49 countries. With just 0.07% TER, it is thus a very efficient instrument for global passive investors.


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