SLYV ETF: Value Is Ahead Of Growth In 2022 Also In Small Caps

SLYV strategy and portfolio

The SPDR S&P 600 Small Cap Value ETF (NYSEARCA:SLYV) has been tracking the S&P SmallCap 600 Value Index since 9/25/2000. It has a large portfolio of 464 stocks, an expense ratio of 0.15% and a distribution yield of 2.10%.

As described in the prospectus by S&P Dow Jones Indices, S&P 600 constituents are ranked regarding value and growth using 3 valuation ratios and 3 growth metrics. The valuation ratios are book value to price, earnings to price and sales to price. By definition, 33% of S&P 600 constituents exclusively belong to each style, and 34% belongs to both styles. The value style subset serves as S&P 600 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 better value rank than its growth rank is given a larger weight in the Value Index than in the Growth Index.

SLYV invests almost exclusively in U.S. companies (99.5% of asset value). It is a bit cheaper than its parent index S&P 600 (IJR) regarding usual valuation ratios (next table). The difference is not as large as expected for a “value” index.

	SLYV	IJR
Price/Earnings TTM	10.19	10.54
Price/Book	1.24	1.53
Price/Sales	0.59	0.79
Price/Cash Flow	7.59	8.34

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The heaviest sectors are financials (21.4%), industrials (17.7%) and consumer discretionary (12.5%). Other sectors are below 9%. Compared to the S&P 600, SLYV significantly underweights technology and healthcare, is on par in consumer discretionary, and slightly overweights all other sectors. As a whole, except for technology and healthcare, the sector breakdown of the value ETF is not very different from the parent index. It may explain why valuation ratios are so close.

The top 10 holdings, listed below with valuation ratios, represent 8% of asset value, and the heaviest position weights about 1%. Therefore, we can consider the fund is well diversified, and the risk related to individual stocks is very low.

Ticker	Name	Weight (%)	P/E TTM	P/E fwd	P/Sales TTM	P/Book	P/Net Free CashFlow	Yield%
HP	Helmerich & Payne, Inc.	1.04	N/A	215.20	2.71	1.76	N/A	2.20
PBF	PBF Energy, Inc.	1.01	3.83	2.02	0.14	1.73	2.44	0
SJI	South Jersey Industries, Inc.	0.92	24.84	20.16	1.79	1.99	N/A	3.58
CVBF	CVB Financial Corp.	0.76	17.30	15.91	7.11	N/A	24.87	3.00
TWNK	Hostess Brands, Inc.	0.75	27.66	26.64	2.81	2.01	30.05	0
FHB	First Hawaiian, Inc.	0.72	14.06	12.78	4.47	1.48	18.08	3.99
PTEN	Patterson-UTI Energy, Inc.	0.71	N/A	39.20	1.69	2.10	N/A	1.06
SANM	Sanmina Corp.	0.70	14.62	11.59	0.47	1.92	15.78	0
REZI	Resideo Technologies, Inc.	0.69	10.30	9.30	0.53	1.36	23.26	0
COOP	Mr. Cooper Group, Inc.	0.68	2.74	15.97	1.08	0.80	0.94	0

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Since October 2000, the difference between SLYV and IJR in return and risk metrics is not significant: only 4 bps in annualized return, 1.6 percentage points in maximum drawdown and 12 bps in volatility (standard deviation of monthly returns). Their risk-adjusted performances are identical (Sharpe ratio).

Since 10/2000	Total Return	Annual.Return	Drawdown	Sharpe ratio	Volatility
SLYV	555.88%	8.90%	-61.35%	0.45	20.17%
IJR	561.17%	8.94%	-59.77%	0.45	20.05%

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SLYV has outperformed IJR by 4.5 percentage points in 2022 to date.

Comparing SLYV with my value benchmark

The Dashboard List is a list of 80 stocks in the S&P 1500 index (occasionally less), 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. After this filter, the 10 companies with the highest Return on Equity in every sector are kept in the list. Some sectors are grouped together: Energy with Materials, Telecom 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 SLYV performance 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
SLYV	555.88%	8.90%	-61.35%	0.45	20.17%
Dashboard List (annual)	1037.60%	11.65%	-56.09%	0.63	17.36%

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

The Dashboard List beats SLYV by 2.75 percentage points in annualized return and shows a lower risk in drawdown and volatility. A note of caution: the ETF performance is real and my list is simulated.

SLYV fundamental shortcomings

The underlying index has two shortcomings in my opinion (like most value indexes in fact). The first one is to classify all stocks on the same criteria. It means 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 privilege sectors where valuation ratios are naturally cheaper, especially financials. Some other sectors are disadvantaged: those with large intangible assets like technology. To make things simple, companies with large intangible assets are those with a business model based on massive R&D, or a strong branding, or large user databases, or operating in a field where competition is limited by an expensive entry ticket. All these elements are not correctly reflected by valuation ratios.

The second flaw is using the price/book ratio (P/B), which adds some risk in the strategy. Intuitively, a large group of companies with low P/B contains a higher percentage of 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 1/1/1999 and 1/1/2022 with elements in equal weight.

	Annual.Return	Drawdown	Sharpe ratio	Volatility
Cheapest quarter in P/B	9.95%	-72.36%	0.48	21.05%
Cheapest quarter in P/E	11.25%	-65.09%	0.57	18.91%
Cheapest quarter in P/S	12.62%	-65.66%	0.6	20.46%
Cheapest quarter in P/FCF	12.23%	-63.55%	0.61	19.05%

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Data calculated with Portfolio123

This explains my choice of using P/FCF and not P/B in the Dashboard List model.

Takeaway

SLYV implements a value strategy in the S&P 600 SmallCap Index with systematic rules using 3 valuation metrics and 3 growth metrics. It has a large, well-diversified portfolio of 464 holdings. No stock weighs much more than 1% of asset value. The sector breakdown is similar to the parent index S&P 600, except a reduction in technology and healthcare weights. The heaviest sector is financials, with 21.4% of asset value. Valuation ratios and past performance metrics are similar to the parent index S&P 600. SLYV may be useful as a component of a tactical allocation strategy (growth/value rotation for example), but it failed to beat the S&P 600 benchmark in two decades. I think there are two shortcomings in the underlying index: it ranks stocks regardless of their sectors and industries, and using the price/book ratio increase risks. A more efficient value model would compare stocks in comparable sets (sector, industry), like I do in the Dashboard List. My model also prefers price/free cash flow to price/book. Moreover, a simple profitability rule helps filter out some value traps.