In search of the truth about large-cap value ETFs.
With large-cap stocks at all-time highs, it’s understandable that investors are trying to figure out how to skin this particular cat.
I know that I look at the S&P 500 Index sitting at almost 1,800 at all-time highs, and I start getting nervous.
Now, I know that presumptive Federal Reserve Chair Janet Yellen told Congress that there’s no bubble. But I tend to ignore most people I see on TV—except Matt Hougan, of course—and stick to the numbers.
Moreover, when I read Paul Baiocchi’s piece on the “cheapest” ETF in the world, I started thinking about valuations.
First off, I’d been hearing from a lot of Street economists talking about the country turning around from the ground up through an “earnings based” corporate recovery. To my mind, that implies that prices go up because earnings go up.
So how’s that market actually looking?
This chart looks at the price-earnings multiples of the S&P 500 Index since the 1970s, courtesy of our friends at Bloomberg.
Note that this uses Bloomberg’s convention for calculation, which is to ignore negative earnings and include only positive earnings from continuing operations. Other charts that include negative earnings, or different “as reported” stats, show more transient spikes during the dot-com boom.
But we’re not in a world where we have a lot of negative and outlier earnings reports, so this seems like a decent place to look.
And what does it tell us? Well, it tells us that with a P/E of around 17, we’re actually in average to above-average territory, depending on where you want to start your chart.
We’re certainly not in any kind of crazy bubble, but neither are we in any kind of deep-value cycle. And with a run-up from a recent low just a few years ago of about 12, it’s understandable that a frequent query I get is, What’s the best large-cap value ETF?
The basic rundown is pretty straightforward. Our analytics system tracks 16 ETFs advertising themselves as large-cap value plays, ranging from the mammoth iShares Russell 1000 Value ETF (IWD | A-88) to the effectively forgotten and expensive Columbia Select Large Cap Value Fund (GVT | C-61).
|iShares Russell 1000 Value||IWD||0.21%||$20,129,075,242|
|iShares S&P 500 Value||IVE||0.18%||$6,317,036,477|
|Schwab U.S. Large-Cap Value||SCHV||0.07%||$766,488,017|
|PowerShares Dynamic Large Cap Value||PWV||0.59%||$701,538,013|
|Vanguard Mega Cap Value||MGV||0.12%||$635,218,008|
|First Trust Large Cap Value AlphaDEX||FTA||0.70%||$585,711,525|
|Guggenheim S&P 500 Pure Value||RPV||0.35%||$440,382,650|
|iShares Morningstar Large-Cap Value||JKF||0.25%||$270,287,371|
|Vanguard Russell 1000 Value||VONV||0.15%||$172,473,000|
|SPDR S&P 500 Value||SPYV||0.20%||$163,012,825|
|Vanguard S&P 500 Value||VOOV||0.15%||$124,170,500|
|iShares Russell Top 200 Value||IWX||0.20%||$123,078,686|
|WisdomTree LargeCap Value||EZY||0.38%||$28,029,678|
|PowerShares Fundamental Pure Large Value||PXLV||0.39%||$12,552,010|
|Columbia Select Large Cap Value||GVT||0.79%||$4,110,265|
As you might surmise, most of these funds are relatively inexpensive, and have a reasonable following—only three funds have less than $100 million in assets.
So which one of these is actually your best safe-haven, large-cap-without-the-bubble play?
To our mind, it’s none of the top three. While the biggest funds here are generally good buys and do what they promise, they all suffer from two big problems.
First, they’re not really pure large-cap funds. We—and most of the market—define true large-cap stocks as those over about $13 billion in market value. The big-three funds here all fish lower than that, down into midcaps. The Vanguard Value ETF (VTV | A-100) includes about 11 percent midcaps, while IWD has a whopping 20 percent in midcaps.
Even the iShares S&P 500 Value ETF (IVE | A-88) and other S&P Value products suffer from a 12 percent weight in midcaps. In fact, it’s a dirty little secret that the S&P itself isn’t really a large-cap index.
The second problem with the top three is that, honestly, none of them really represents deep value.
So, next I sorted the universe of funds here by price-to-book ratio, the favorite statistic of value investors everywhere, to see what may be seen.
|Guggenheim S&P 500 Pure Value||RPV||24.58||1.3||1.28%|
|First Trust Large Cap Value AlphaDEX||FTA||16.51||1.61||1.86%|
|PowerShares Fundamental Pure Large Value||PXLV||18.15||1.64||1.84%|
|iShares Morningstar Large-Cap Value||JKF||14.91||1.73||2.45%|
|iShares Russell 1000 Value||IWD||17.34||1.74||1.99%|
|Vanguard Russell 1000 Value||VONV||17.38||1.74||2.02%|
|iShares Russell Top 200 Value||IWX||15.8||1.75||2.00%|
|PowerShares Dynamic Large Cap Value||PWV||14.62||1.76||1.95%|
|Columbia Select Large Cap Value||GVT||19.65||1.83||1.63%|
|WisdomTree LargeCap Value||EZY||16.74||1.91||1.45%|
|iShares S&P 500 Value||IVE||17.88||1.94||2.11%|
|SPDR S&P 500 Value||SPYV||17.88||1.94||2.18%|
|Vanguard S&P 500 Value||VOOV||17.88||1.94||2.02%|
|Vanguard Mega Cap Value||MGV||16.25||1.95||2.32%|
|Schwab U.S. Large-Cap Value||SCHV||17.44||2.04||2.33%|
On this basis alone, the Guggenheim S&P 500 Pure Value ETF (RPV | A-53) comes out as the leader, and is our “analyst pick” in the space largely for that reason.
It’s the “value-iest” of the value ETFs, and its pure value methodology ensures that stocks that are sort-of-growth and a little-bit-value don’t make the cut. The resulting fund only holds just 112 stocks.
And while we stand behind our pick here, I feel I need to point out two big bets you’re making here.
First, RPV is dipping deep into the midcaps, with almost half the portfolio coming from the very bottom of the S&P 500 market-cap spectrum. Second, while the pure-value methodology considers three factors to assess value—P/B; P/E; and price-to-sales—the resulting portfolio features a higher P/E than the overall S&P 500! This is truly an old-school book value play.
If that makes you uncomfortable, then we do have two alternatives for you to consider.
The Vanguard Mega Cap Value ETF (MGV | A-100) earns a special spot on our “Opportunities List,” as it sticks to the large-cap knitting and provides broad, traditional value exposure at a lower P/E than the market.
The other entry on our list, the iShares Morningstar Large-Cap Value (JKF | A-85) splits the difference between the two, keeping firmly large-cap focused while dipping deeper down into the “style pure” waters.
Who knew there could be so much disagreement on what something as simple as “large cap” or “value” means? It’s just another case where it pays to dig under the hood, and look beyond just the biggest of the big funds.
Note: Investors interested in the often counterintuitive relationship between P/E and P/B should check out this excellent paper, “Returns to Buying Earnings and Book Value: Accounting for Growth and Risk,” by Francesco Reggiani and Stephen Penman.
At the time this article was written, the author held no positions in the securities mentioned. Contact Dave Nadig at [email protected]