MDYV: Mid Cap Value ETF Review (NYSEARCA:MDYV)

If you have read my recent post on IJJ, you will find redundant information in this one: both funds track the same index. However, MDYV shows some differences, especially in AUM, liquidity and historical tracking errors.

Strategy and portfolio

The SPDR S&P 400 Mid Cap Value ETF (NYSEARCA:MDYV) has been tracking the S&P Mid-Cap 400 Value Index since 11/8/2005. It has 299 holdings, a 12-month trailing yield of 1.69%, and a total expense ratio of 0.15%.

As described by S&P Dow Jones Indices, S&P 400 constituents are ranked in Value and Growth styles using valuation and growth metrics. The valuation ratios are book value to price, earnings to price and sales to price. By construction, 33% of the parent index constituents exclusively belong to each style, and 34% belongs to both styles. The Value subset serves as S&P 400 Value Index and is rebalanced annually. It is capital-weighted, with an adjustment for constituents belonging to both styles. For example, a company with a value rank better than its growth rank is given a larger weight in the Value Index than in the Growth Index.

Aggregate valuation metrics of MDYV are not much better than for the parent index S&P Mid-Cap 400, represented in the next table by the iShares Core S&P MidCap ETF (IJH). MDYV is even a bit more expensive in price-to-cash-flow.

	MDYV	IJH
Price/Earnings TTM	12.87	13.89
Price/Book	1.81	2.34
Price/Sales	0.98	1.26
Price/Cash Flow	11.27	11.1

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Source: Fidelity.

The top sectors are financials (19.1%), industrials (17.9%) and consumer discretionary (17.1%). Compared to IJH, MDYV overweights financials, consumer discretionary, and real estate. It underweights energy by a wide margin.

DYV has about 300 holdings. The top 10 names, listed below, represent 8.3% of asset value. The heaviest one weighs about 1%, so risks related to individual stocks are very low.

Ticker	Name	Weight%	P/E ttm	P/E fwd	P/Sales	P/Book	P/FCF	Yield%
JBL	Jabil Inc.	0.98	12.09	9.96	0.33	4.55	28.86	0.38
RRX	Regal Rexnord Corp.	0.91	21.66	14.95	2.01	1.64	40.16	0.89
CLF	Cleveland-Cliffs, Inc.	0.91	4.36	6.96	0.45	1.49	4.93	0.00
RGA	Reinsurance Group of America, Inc.	0.87	16.21	9.35	0.62	2.76	8.30	2.15
WBS	Webster Financial Corp.	0.84	15.65	8.15	3.57	1.28	9.34	2.88
AA	Alcoa Corp.	0.82	N/A	22.04	0.74	1.86	34.89	0.75
CPRI	Capri Holdings Ltd.	0.75	11.57	9.66	1.55	4.24	51.57	0.00
UGI	UGI Corp.	0.74	46.38	13.39	0.74	1.70	N/A	3.54
JLL	Jones Lang LaSalle, Inc.	0.73	9.97	11.40	0.40	1.50	40.36	0.00
FBIN	Fortune Brands Innovations, Inc.	0.73	11.55	10.90	1.06	2.80	67.66	1.41

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Ratios: Portfolio123.

Competitors

MDYV has two direct competitors tracking the same underlying index: the iShares S&P Mid-Cap 400 Value ETF (IJJ) and the Vanguard S&P Mid-Cap 400 Value ETF (IVOV). The next table compares their asset values, volumes, fees and inception dates.

S&P Mid-Cap 400 Value ETFs	IJJ	MDYV	IVOV
AUM	$8.34B	$2.74B	$894.13M
Avg Daily Volume	641.48K	334.02K	14.89K
Expense Ratio	0.18%	0.15%	0.15%
Inception	7/24/2000	11/8/2005	09/07/2010

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Since IVOV inception, IJJ and IVOV have followed the same path, whereas MDYV shows some negative drift (see next chart).

However, since January 2016, the 3 funds have identical paths:

My guess is that MDYV has suffered from tracking errors before 2016, and they have been fixed since then.

Performance

Since inception in November 2005, MDYV has lagged the parent index by about one percentage point in annualized return (see next table). Risk is a bit higher, measured in drawdown and standard deviation of monthly returns (volatility).

	Total Return	Annual.Return	Drawdown	Sharpe ratio	Volatility
MDYV	304.78%	8.45%	-60.71%	0.45	19.53%
IJH	381.17%	9.55%	-55.07%	0.52	18.42%

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Data calculated with Portfolio123

However, based on IJJ price history, the underlying index has outperformed IJH by 1.17 percentage point in annualized return since July 2000.

since July 2000	Total Return	Annual.Return	Drawdown	Sharpe ratio	Volatility
MDY underlying index	833.39%	10.43%	-58.00%	0.55	18.62%
IJH	634.34%	9.26%	-55.07%	0.5	18.07%

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The S&P Mid-Cap 400 Value Index has a competitor: the Russell Mid-Cap Value Index, tracked by the iShares Russell Mid-Cap Value ETF (IWS) since 7/17/2001. Based on IIJ price history, both indexes have been on par until Q2 2022, then the S&P index took the lead over the Russell index. However, outperformance of one over the other has already happened in limited periods of time. It is unlikely to be significant in the long term.

Comparison with my Dashboard List model

The Dashboard List is a list of 60 to 80 stocks in the S&P 1500 index, updated every month based on a simple quantitative methodology. All stocks in the Dashboard List are cheaper than their respective industry median in Price/Earnings, Price/Sales and Price/Free Cash Flow. An exception in utilities: the Price/Free Cash Flow is not taken into account to avoid some inconsistencies. Then, the 10 eligible companies with the highest Return on Equity in every sector are kept in the list. Some sectors are grouped together: energy with materials, communication with technology. Real estate is excluded because these valuation metrics don’t work well in this sector. I have been updating the Dashboard List every month on Seeking Alpha since December 2015, first in free-access articles, then in Quantitative Risk & Value.

The next table compares MDYV since inception with the Dashboard List model, with a tweak: here, the list is reconstituted once a year to make it comparable with a passive index.

	Total Return	Annual.Return	Drawdown	Sharpe ratio	Volatility
MDYV	304.78%	8.45%	-60.71%	0.45	19.53%
Dashboard List (annual)	432.06%	10.19%	-57.65%	0.54	18.35%

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Past performance is not a guarantee of future returns. Data Source: Portfolio123

The Dashboard List outperforms MDYV by about 1.7 percentage points in annualized return. A note of caution: ETF price history is real, whereas the model simulation is hypothetical.

Price to Book: a risky concept of value

I like the idea of mixing various ratios to rank value stocks. However, I think most value indexes doing so have two weaknesses, and MDYV is no exception. The first one is to classify all stocks on the same criteria. It means the valuation ratios are considered comparable across sectors. Obviously, they are not: you can read my monthly dashboard here for more details about this topic. A consequence is to overweight sectors where valuation ratios are naturally cheaper, especially financials. Some other sectors are disadvantaged: those with large intangible assets like technology. Intangible assets are not reflected by valuation ratios.

The second weakness comes from the price/book ratio (P/B), which adds some risk in the strategy. History shows that a large group of companies with low P/B has a higher probability to hold value traps than a same-size group with low price/earnings, price/sales or price/free cash flow. Statistically, such a group will also have a higher volatility and deeper drawdowns in price. The next table shows the return and risk metrics of the cheapest quarter of the S&P 500 (i.e.125 stocks) measured in price/book, price/earnings, price/sales and price/free cash flow. The sets are reconstituted annually between 1/1/2000 and 1/1/2023 with elements in equal weight.

	Annual.Return	Drawdown	Sharpe ratio	Volatility
Cheapest quarter in P/B	8.54%	-81.55%	0.35	37.06%
Cheapest quarter in P/E	10.71%	-73.62%	0.48	25.01%
Cheapest quarter in P/S	12.82%	-76.16%	0.47	34.83%
Cheapest quarter in P/FCF	15.32%	-74.77%	0.61	27.03%

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Data calculated with Portfolio123.

This explains why I use P/FCF and not P/B in the Dashboard List model.

Takeaway

SPDR S&P 400 Mid Cap Value ETF tracks the S&P Mid-Cap 400 Value Index, whose constituents are selected and weighted based on several value and growth metrics. It has 3 close competitors: IJJ, IVOV and IWS. IJJ and IVOV have the same underlying index, whereas IWS tracks the Russell Mid-Cap Value Index. This index has been lagging recently, but shows a similar performance over the long term.

MDYV, IJJ and IVOV are equivalents for long-term investors. MDYV and IJJ are better than IVOV for tactical asset allocation and trading, because they have much higher trading volumes. For example, MDYV may be part of a strategy switching between value and growth, and/or between large and mid-cap.

SPDR S&P 400 Mid Cap Value ETF seems to have suffered from tracking errors in the past, but not since 2016. It has lagged its parent index by about 1 percentage point in annualized return since inception in 2005, but the underlying index beats it by 1.2 points since 2000. The methodology has two weaknesses: it ranks stocks regardless of their industries, and it relies too much on the price/book ratio.