SPLG: S&P 500 Dashboard For January (NYSEARCA:SPLG)

About SPLG

This monthly article series reports sector metrics in the S&P 500 index. It is also a top-down review of all funds tracking it. Among them, the SPDR Portfolio S&P 500 ETF (NYSEARCA:SPLG), launched in November 2005, is less popular than the SPDR S&P 500 ETF Trust (SPY). However, it has a lower expense ratio (0.03% vs. 0.09%) and a lower share price, offering more flexibility to small investors who can’t trade fractional shares. It has about $13B of assets under management and an average daily volume of 3.8 million shares. SPLG pays quarterly dividends.

Shortcut

The next two paragraphs in italic describe the dashboard methodology. They are necessary for new readers to understand the metrics. If you are used to this series or if you are short of time, you can skip them and go to the charts.

Base Metrics

I calculate the median value of five fundamental ratios in every sector: Earnings Yield (“EY”), Sales Yield (“SY”), Free Cash Flow Yield (“FY”), Return on Equity (“ROE”), Gross Margin (“GM”). All are calculated on trailing 12 months. For all these ratios, higher is better and negative is bad. EY, SY and FY are medians of the inverse of Price/Earnings, Price/Sales and Price/Free Cash Flow. They are better for statistical studies than price-to-something ratios, which are unusable when the “something” is close to zero or negative (for example, companies with negative earnings). I also calculate two momentum metrics for each group: the median monthly return (RetM) and the median annual return (RetY).

I prefer medians rather than averages because a median splits a set in a good half and a bad half. Capital-weighted averages are skewed by extreme values and the largest companies. As a consequence, these metrics are designed for stock-picking rather than index investing.

Value and Quality Scores

Historical baselines are calculated as the averages on a look-back period of 11 years for all metrics. They are noted respectively EYh, SYh, FYh, ROEh, GMh. For example, the value of EYh for technology in the table below is the 11-year average of the median Earnings Yield of S&P 500 tech companies.

The Value Score “VS” is the average difference in % between the three valuation ratios (EY, SY, FY) and their baselines (EYh, SYh, FYh). The same way, the Quality Score “QS” is the average difference between the two quality ratios (ROE, GM) and their baselines (ROEh, GMh).

VS may be interpreted as the percentage of undervaluation or overvaluation relative to the baseline (positive is good, negative is bad). This interpretation must be taken with caution: the baseline is an arbitrary reference, not a supposed fair value. The formula assumes that the three valuation metrics are of equal importance, except in energy and utilities where the Free Cash Flow Yield is ignored to avoid some inconsistencies. VS and QS are capped between -100 and +100 when the calculation goes beyond these values.

Current data

The next table shows the metrics and scores as of last week’s closing. Columns stand for all the data defined above.

	VS	QS	EY	SY	FY	ROE	GM	EYh	SYh	FYh	ROEh	GMh	RetM	RetY
All	-11.95	7.97	0.0437	0.3937	0.0231	17.22	46.54	0.0451	0.4439	0.0294	15.02	45.93	-4.51%	-12.68%
Cs. Discretionary	-17.98	-0.46	0.0418	0.6530	0.0176	22.44	34.14	0.0465	0.6595	0.0308	21.31	36.40	-4.89%	-20.59%
Cs. Staples	-21.09	-3.34	0.0370	0.4393	0.0141	23.83	37.89	0.0438	0.4950	0.0222	23.66	40.93	-1.54%	0.38%
Energy	100.00	100.00	0.1181	0.5304	0.0684	30.37	48.66	0.0194	0.5405	-0.0140	5.51	42.64	-3.98%	56.27%
Financials	-1.49	12.60	0.0721	0.4182	0.0685	12.48	79.75	0.0692	0.4487	0.0698	10.73	73.21	-4.94%	-12.14%
Healthcare	-9.30	5.88	0.0381	0.2534	0.0308	17.69	64.43	0.0371	0.2989	0.0364	16.22	62.74	-1.54%	-8.22%
Industrials	-28.48	7.00	0.0375	0.4105	0.0181	24.07	36.15	0.0468	0.5752	0.0287	20.73	36.94	-4.46%	-8.38%
Technology	-19.33	15.74	0.0367	0.2107	0.0282	27.72	62.83	0.0402	0.2836	0.0369	21.11	62.74	-6.70%	-27.42%
Communication	-3.85	-14.17	0.0379	0.8190	0.0216	11.77	55.39	0.0491	0.5299	0.0381	16.81	54.49	-4.64%	-29.04%
Materials	-9.66	22.77	0.0594	0.6070	0.0099	24.27	37.19	0.0448	0.6192	0.0245	17.01	36.15	-4.89%	-13.60%
Utilities	-15.50	2.88	0.0481	0.3978	-0.0815	10.17	39.52	0.0508	0.5353	-0.0476	9.67	39.30	-0.40%	2.48%
Real Estate	51.14	35.26	0.0345	0.1162	0.0127	10.89	64.83	0.0212	0.1149	0.0067	6.35	65.43	-5.34%	-27.34%

Click to enlarge

*capped for convenience

Score charts

The next chart plots the Value and Quality Scores by sector (higher is better).

Score variations since last month:

Momentum chart:

Interpretation

A hypothetical S&P 500 “median” company is overvalued by about 12% relative to average valuation metrics since 2012. Its quality score is above the baseline. We can translate median yields in their inverse ratios:

Price/Earnings: 22.88 – Price/Sales: 2.54 – Price/Free Cash Flow: 43.29

Starting in 2023, energy is the best-ranked sector regarding value, quality, and momentum. Real estate also looks very attractive, with excellent scores in both value and quality. Financials are close to the baseline in value, and above it in quality. Usual fundamental ratios are less meaningful in real estate and financials, but comparing aggregate metrics to their historical averages makes sense. Communication, materials, and healthcare are overvalued by less than 10% relative to 11-year averages. It may be justified by a good quality score for materials, and to a lesser extent for healthcare. Other sectors are overvalued by 15% to 29% relative to the baseline. Industrials are the most overvalued. All sectors are above the quality baseline, except consumer staples, consumer discretionary and communication.

SPLG and SPY are down -18.3% in 12 months, the median return of the S&P 500 is at -12.7% (reported above in the table) and the equal-weight average at -11.5% (measured on RSP). It means the capital-weighted index performance was skewed to the downside by mega cap companies.

We use the table above to calculate value and quality scores. It may also be used in a stock-picking process to check how companies stand among their peers. For example, the EY column tells that a large consumer staples company with an Earnings Yield above 0.0370 (or price/earnings below 27.03) is in the better half of the sector regarding this metric. A Dashboard List is sent every month to Quantitative Risk & Value subscribers with the most profitable companies standing in the better half among their peers regarding the three valuation metrics at the same time.