When the value factor and the related exchange-traded funds rebounded last year, investors were reminded that value stocks had been on a surprisingly long streak of lagging growth equivalents. Actually, the value factor has lagged the broader market over the past several years.
For example, the iShares S&P 500 Value ETF (NYSE: IVE) and the iShares Russell 1000 Value ETF (NYSE: IWD) are each up about 30 percent over the past three years, but the S&P 500 is higher by more than 36 percent over that period.
Still, investors looking to access the value factor via funds rather than single stocks should note that actively managed value funds are struggling to beat their benchmarks.
“In 2016, the majority of actively managed large-cap value mutual funds underperformed the S&P 500 Value index, continuing a now seven-year run of failing to keep up with index alternatives,” said CFRA Research in a note out Wednesday. “In the last 15 years, the majority of large-cap growth funds outperformed the S&P 500 Growth index eight times, a more than respectable record. However, such success for value funds occurred in just five years and it has not occurred since 2009.”
Not surprisingly, higher fees for actively managed fees are a drag on investors' outcomes. IVE and IWD charge just 0.18 percent and 0.2 percent per year, respectively. The Vanguard Value ETF (NYSE: VTV) charges just 0.08 per year, or $8 on a $10,000 investment. That makes VTV cheaper than 93 percent of rival funds.
“It is easy to point to the 1.1 percent Lipper peer average net expense ratio as the culprit for the underperformance relative to a free index. Yet, in 2016, the average active fund in the SPIVA study rose 14.21 percent and lagged the index by 319 basis points. Meanwhile, the largest ETF tracking the S&P 500 index iShares S&P 500 Value (IVE) has a 0.18 percent expense ratio and gained 17.31 percent,” said CFRA.
The $13.6 billion IVE holds 352 stocks. As is the case with many value ETFs, IVE has a large allocation to the financial services sector at 26.1 percent. Large energy exposure is another hallmark of value ETFs and IVE allocates 11.5 percent to that sector.
CFRA has an Overweight rating on IVE.
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