Value ETFs Don’t Add Value

Value is a much revered investment style. It combines the intellectual appeal of a rational foundation (mathematically justifiable price expectations, margins of safety, discounted future cash flows, etc.) with a bit of star appeal (the ability to emulate the likes of Ben Graham, Warren Buffett et. al.). So “Value” versions of popular ETFs would seem to be a no-brainer. Or not.

A Cold Spell

Value has been struggling lately. Over the past 12 months, the 35 Value ETFs in the Portfolio123 database declined 13.42% on average versus a loss of 8.08% for the SPDR S&P 500 ETF (SPY).

Table 1 shows performance of various sub-categories of ETFs based on company size and method: Standard market cap weighting, Smart Beta (weighting based on factors other than market cap) and Quant (models not necessarily based on Smart Beta weightings).

Table 1 – Value ETF Total Return 2/10/15 – 2/9/16

Benchmark – SP 500 ($SPY) -8.08% Benchmark – Russell 2000 ($IWM) -18.71%     All Value -13.42% All Large Cap Value -10.98% All Small Cap Value -15.73%     Standard Value -12.27% Standard Large Cap Value -10.21% Standard Small Cap Value -14.36%     Smart Beta Value -12.83% Smart Beta Large Cap Value -12.01% Smart Beta Small Cap Value -18.41%     Quant Value -17.82% Quant Large Cap Value -13.52% Quant Small Cap Value -26.45%

It’s not perfectly awful. It looks like small-cap market-cap weighted Value ETFs outperformed the $IWM benchmark. But lucky-choosing aside, I’m not sure the kind of analysis that might have led an investor to that category is the sort of task ETF investors expect to take on when they decide to track an index.

The Longer Term Is Not Much Better

It’s tempting to explain this away by referring to the notion that all styles run hot and cold from time to time but that over the long term, value should shine.

Table 2 summarizes Value ETF performance over a longer period, from 1/2/2001 through the present.

Table 2 – Value ETF Avg. Annl. Total Return 1/2/01 – 2/9/16

Benchmark – SP 500 ($SPY) 6.41% Benchmark – Russell 2000 ($IWM) 5.93%     All Value 7.12% All Large Cap Value 6.02% All Small Cap Value 6.87%