iShares S&P 500 Value ETF: Now Is The Time To Invest – iShares S&P 500 Value ETF (NYSEARCA:IVE)

ETF Overview

iShares S&P 500 Value ETF (IVE) owns a portfolio of U.S. large-cap value stocks. The fund seeks to track the investment results of the S&P 500 Value Index. The top 10 stocks in IVE’s portfolio have competitive positions than many of their peers. We believe IVE’s higher exposure to cyclical sectors may act as a tailwind in 2020. This is because we think the U.S. economy is still robust with a lower unemployment rate. The Federal Reserve’s actions to cut rates should gradually restore business confidence and result in a re-inflationary environment. This environment should support many of the cyclical stocks in its portfolio. Therefore, we think this may be a good time to invest in IVE.

Data by YCharts

Fund Analysis

Market-cap weighting approach is actually disadvantageous for value investing

Since stocks in IVE’s portfolio are stocks in the S&P 500 Index, they are large or giant cap stocks. Investors should keep in mind that large-cap stocks are usually widely followed and if they trade at lower valuations, there are usually some reasons behind that. These discounted stocks may have lower growth outlook or are currently facing some headwinds. Therefore, the market is not willing to give it a higher valuation. Even if they do trade at a significant discount, IVE’s market-cap weighting approach means that these “undervalued” stocks’ weighting will be reduced. Therefore, IVE’s portfolio of large and giant-cap stocks and its market-cap weighting approach kind of defeats the purpose of finding value stocks. It is better to have higher weighting to stocks that are trading at a discount. However, with a market-cap weighting approach, its weightings are usually lowered. Perhaps, this is the reason why IVE’s fund performance lagged the S&P 500 Index. As can be seen from the chart below, IVE delivered a total return of 216% in the past 10 years. This is lower than S&P 500 Index’s 259.3%.

Chart

Data by YCharts

Its top 10 stocks are stocks with moats

Fortunately, most of the stocks in IVE’s portfolio are stocks with competitive positions. They may be stocks with slower growth or fall out of favor by the markets. Nevertheless, they are stocks with moats. As can be seen from the table below, its top 10 stocks (which represent about 27.24% of IVE’s total holdings) have either narrow or wide moat status as classified by Morningstar. Indeed, these are stocks that should continue to outperform many of its smaller peers.

as of 11/01/2019

% of ETF

Sector

Moat Status

AAPL

APPLE INC

9.06

Information Technology

Narrow

JPM

JPMORGAN CHASE & CO

3.41

Financials

Wide

T

AT&T INC

2.37

Communication

Narrow

BAC

BANK OF AMERICA CORP

2.22

Financials

Wide

UNH

UNITEDHEALTH GROUP INC

1.99

Health Care

Wide

CVX

CHEVRON CORP

1.84

Energy

Narrow

BRK.B

BERKSHIRE HATHAWAY INC CLASS B

1.83

Financials

Wide

WFC

WELLS FARGO

1.74

Financials

Wide

WMT

WALMART INC

1.39

Consumer Staples

Wide

C

CITIGROUP INC

1.39

Financials

Narrow

Top 20 Holdings

27.24

Source: Created by author

IVE has higher exposure to cyclical sectors

Cyclical and rate sensitive sectors represent a large chunk of IVE’s portfolio. As can be seen from the chart below, these sectors include financials, information technology, industrials, consumer discretionary, energy, and materials. They account for nearly 66% of IVE’s portfolio. This is higher than S&P 500 Index’s 59%.

Source: iShares Website

The economic and trade uncertainties in the past 1 year have caused many investors to shift their assets from cyclical sectors (often perceived as riskier sectors) to defensive sectors such as utilities and consumer staples. As a result, valuations of stocks in the defensive sectors have been inflated. Many are trading at historically high valuations. On the other hand, some cyclical sectors such as energy and materials are trading at historically low valuations. Therefore, it is not surprising that cyclical sectors represent a higher portion of IVE’s portfolio.

IVE is trading at a discount to S&P 500 Index

Stocks in IVE’s portfolio are trading at an average forward P/E ratio of 15.24x. This is much lower than the S&P 500 Index’s 18.64x (see table below). IVE’s valuation is nearly 3.5x multiples lower than the S&P 500 Index. IVE’s price to cash flow ratio of 6.99x is also lower than the S&P 500 Index’s 9.58x. While we acknowledge that IVE’s lower valuation may have to do with its lower sales growth and cash flow growth rates, we feel the valuation gap is still too wide. Therefore, we do see value of this ETF.

IVE

S&P 500 Index

Forward P/E Ratio

15.24x

18.64x

Price to Cash Flow Ratio

6.99x

9.58x

Price to Book Sales

2.29x

3.20x

Sales Growth (%)

6.43%

7.06%

Cash Flow Growth (%)

9.14%

13.09%

Source: Morningstar, Created by author

Is this the time to invest now?

If you are a value investor, we think this is likely a good time to invest in value stocks and IVE is a good investment vehicle. We believe trade and economic uncertainties may continue to impact the ISM manufacturing data in the U.S. However, the better than expected Q3 2019 GDP number (1.9% growth rate) is a sign of the robust U.S. economy. With a record low unemployment rate and healthy consumer spending, we do not think a recession is coming. The Federal Reserve’s action to lower its key interest rate recently should help stabilize the market and improve business confidence. As long as the consumer spending remains robust, the risk of a recession is low. Once the economy growth rate re-accelerates next year, demand for industrial products and energy products should rise. Coupled with continual consumer spending, we believe inflation will also re-inflate in 2020. These are positive catalysts for stocks in cyclical sectors such as financials, energy, industrials, and materials. As market sentiment improves, the valuations of stocks in IVE’s portfolio may expand.

Investor Takeaway

IVE provides an interesting way to invest in value stocks. However, its strategy does not necessarily beat the S&P 500 Index in the long term due to its market-cap weighting approach. However, we see catalyst that may drive its fund price higher through 2020. Therefore, we think this is the time to buy IVE now.

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.

Additional disclosure: This is not financial advice and that all financial investments carry risks. Investors are expected to seek financial advice from professionals before making any investment.

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