You can’t predict, [but] you can prepare. – Howard Marks

Value stocks have come into vogue of late. As pointed out in The Lead-Lag Report, this cohort has outperformed the growth segment over the last three months and looks like it has legs. In light of this recent interest, I thought it would be a good time to review one of the blue-chip value ETFs – The iShares S&P 500 Value ETF (NYSEARCA:IVE), which has been around for more than 20 years and is the oldest in this space.

Key features

As the name suggests, IVE tracks the performance of the S&P 500 Value index- this is the subset of the S&P 500 and covers large-cap stocks exhibiting the strongest value characteristics. To qualify for this index, stocks are measured on the basis of three fundamental screeners – price to book value, price to earnings, and price to sales. IVE uses the passive approach or representative sampling indexing strategy to track the S&P 500 Value index, and this tracking methodology tends to keep expense ratios low, relative to the average ETF expense ratio. Yet still, IVE is not as efficient as the other big peers in this space – Vanguard S&P 500 Value ETF (NYSEARCA:VOOV) and SPDR Portfolio S&P 500 Value ETF (NYSEARCA:SPYV); SPYV’s expense ratio is dirt-cheap at 0.04%, followed by VOOV at 0.1%, IVE is comparatively steeper at 0.18%. When you pursue plain vanilla ETFs such as this, small differences in the expense ratio may likely tilt investors’ interests towards IVE’s peers. That said, if you’re someone who has more of an inclination to trade, SPYV should be your preferred bet as spreads are best-in-class at 0.02% vs 0.03% for SPYV, and 0.04% for VOOV. Size-wise as well, IVE dwarfs its peers with an AUM of almost $18bn vs $7bn for SPYV and $1.41bn for VOOV.

Dividends are an important requirement for those chasing value stocks; IVE has been able to grow its dividends for the last 10 years (7% CAGR), and you’ll currently be able to pocket a yield of 2.4%. However, do note that this is still lower than the yield of peers; VOOV and SPYV currently offer dividend yields of 2.9% and 2.5%.

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Holdings analysis

An investment in IVE will give you access to close to 400 value names. This ETF does not suffer from any significant concentration risk with no single stock accounting for more than 4% of the total holdings. The weight of the top-10 stocks too is well-controlled, accounting for just 20% of the total holdings.

Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B), the stock with the largest weight in this ETF (3.76%), has made headlines for much of 2020, due to its relative inaction in deploying its large reserves of cash. I felt that the company missed a trick by not picking up good-quality assets during the carnage in March; this was quite uncharacteristic of the company, as it tends to be most forceful in its purchases when there is wide-spread panic. As mentioned recently in The Lead-Lag Report, the company’s cash gunpowder currently stands at a whopping $150bn and this excess cash has been one of the key reasons why the stock’s current forward P/BV (1.25x) trades at a discount to its long-term average (1.31x). However, recently, there have been some efforts to address this, with the company spending c.$35bn in Q3 (of which $18bn was spent towards stock purchases) with some keen focus towards the healthcare segment implying its relative undervalued nature.

Speaking of the healthcare segment, you’d be interested to know that it has the largest weight in this ETF with a share of over 20% and three names in the top-10 (UNH, PFE, and JNJ). As highlighted in The Lead-Lag Report, over recent weeks, this segment has not fared too well, as fund outflows have been rampant in the defensive sectors with investors prepared to take on more risk. Besides, people have also come to the realization that only a few specific stocks would likely benefit from the vaccine theme. That said, over the medium term, I still think this sector has a lot to offer. A couple of weeks back, I had shared a chart showing that the forward valuations of these healthcare stocks were not keeping pace with their earnings growth potential. This cannot go on for too long, and at some point, you will see an expansion in the average valuation multiple.

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The other sector with a significant weight in this ETF is the financial segment which also has three names in the top 10 (BRK.B, BAC, and JPM). This has been one of the key participants in the November rally as investors seek to make up for lost time. 2021 has the potential to be a year in which we see a more fruitful lending environment with likely low credit risk, relative to 2020. That said, the prospect of any long-term outperformance will depend on whether rates can start trending up, and at the moment, we are not yet there. At the other end of the spectrum, energy and basic materials have been witnessing some good momentum of late, but this fund hasn’t been able to benefit from this, as exposure here is very little at 4.4% and 2.5% respectively. This could be a problem going forward as energy and materials are good proxies for the reopening of the global economy and ideally you’d want some larger exposure here.


The value segment looks like a promising place to deploy one’s funds; as you can see from the chart below, for much of 2020, the value to growth ratio has hovered around remarkably overstretched levels, and it wouldn’t be outlandish to expect some normalization here. As per YCharts estimates, the forecasted P/E ratio for IVE currently stands at 14x, a significant discount of c.44% to the iShares S&P 500 Growth ETF forecasted P/E multiple of 25x.

That said, I am not sure if this is the best choice for those chasing large-cap value funds. Peers such as VOOV and SPYV are more efficient and offer better dividend yields. Neutral on IVE.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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