XSVM: Valuation And Growth Are Attractive, Returns, Not So Much

seekingalpha04-27

Invesco S&P SmallCap Value with Momentum ETF selects and weights small-cap stocks based on 3 valuation ratios and momentum.Not only is the valuation attractive, but fundamental growth rates are also ...

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Reviews with updated data are posted when necessary. XSVM strategy Invesco S&P SmallCap Value with Momentum ETF (NYSEARCA:XSVM) started investing operations on 03/03/2005 and tracks the S&P 600 High Momentum Value Index. It has a portfolio of 115 stocks, a 30-day SEC yield of 1.69% and an expense ratio of 0.36%. Distributions are paid quarterly. As described in the prospectus by Invesco, stocks in the parent index S&P 600 are given a value score based on three ratios: book-value-to-price, earnings-to-price, and sales-to-price. Then, a momentum score is given to the 240 stocks with the highest value score. It is calculated from the 12-month return, excluding the most recent month. The 120 stocks with the highest momentum score are included in the S&P 600 High Momentum Value Index and weighted based on their value score. The index is reconstituted and rebalanced twice a year. The portfolio turnover rate in the most recent fiscal year was 86%. This article will use as a benchmark the parent index S&P 600, represented by iShares Core S&P Small-Cap ETF (IJR). XSVM portfolio The portfolio is exclusively invested in U.S. companies, about 65% in micro-caps and 35% in small caps per Fidelity classification. The three heaviest sectors are well-balanced: consumer discretionary (22.3%), industrials (21.7%) and financials (21.6%). Other sectors are under 11%. Compared to the parent index S&P 600, XSVM is mostly overweighting consumer discretionary and energy. It is significantly underweight healthcare, technology, real estate, and entirely ignores utilities.   XSVM sector breakdown (chart: author; data: Fidelity, iShares) The top 10 holdings represent 14.9% of assets. The next table lists their weights and valuation ratios. The largest position is below 2%, so risks related to individual companies are low.   Ticker Name Weight% P/E ttm P/E fwd P/Sales P/Book P/FCF Yield   JXN Jackson Financial, Inc. 1.71 6.96 4.30 1.78 0.58 1.11 4.02   VTLE Vital Energy, Inc. 1.68 1.66 5.91 1.05 0.59 N/A 0   KELYA Kelly Services, Inc. 1.64 24.14 12.97 0.18 0.68 16.79 1.27   FDP Fresh Del Monte Produce, Inc. 1.56 N/A 10.93 0.29 0.65 14.62 3.89   DXPE DXP Enterprises, Inc. 1.55 13.15 14.28 0.52 2.28 9.24 0   SCSC ScanSource, Inc. 1.43 12.26 12.28 0.30 1.11 5.71 0   EZPW EZCORP, Inc. 1.40 18.69 9.97 0.89 1.24 12.56 0   GBX Greenbrier Cos., Inc. 1.34 15.60 12.39 0.47 1.33 N/A 2.25   KSS Kohl's Corp. 1.34 8.50 10.19 0.15 0.69 7.26 8.24   SNEX StoneX Group, Inc. 1.31 9.90 9.65 0.03 1.50 N/A 0   Click to enlarge Ratios: Portfolio123 XSVM fundamentals Aggregate valuation ratios are much cheaper than for the parent index, as reported in the next table. The difference in price/sales is especially impressive. Additionally, XSVM shows superior fundamental growth metrics, which is quite uncommon for a value fund.     XSVM IJR   Price/Earnings TTM 9.53 15.22   Price/Book 1.22 1.67   Price/Sales 0.44 0.97   Price/Cash Flow 5.02 8.48   Earnings growth 24.99% 18.27%   Sales growth 7.18% 5.57%   Cash flow growth 20.53% 9.25%   Click to enlarge Source: Fidelity. Historical performance Since 4/1/2005, XSVM has marginally outperformed IJR, but the difference in annualized return is insignificant (13 bps). It is also a little bit riskier regarding drawdown and volatility (standard deviation of monthly returns), which results in a slightly lower risk-adjusted performance (Sharpe ratio).     Total Return Annual Return Drawdown Sharpe ratio Volatility   XSVM 419.15% 9.02% -62.57% 0.46 22.21%   IJR 407.48% 8.89% -58.15% 0.49 19.78%   Click to enlarge Data calculated with Portfolio123. Nonetheless, over the last 12 months, XSVM beats the small-cap benchmark by 14%: XSVM vs. IJR (Seeking Alpha) Competitors The next table compares characteristics of XSVM and five other small cap value funds:  Vanguard S&P SmallCap 600 Value ETF (VIOV), reviewed here, iShares Russell 2000 Value ETF (IWN), reviewed here, Dimensional US Small Cap Value ETF (DFSV), reviewed here, Avantis U.S. Small Cap Value ETF (AVUV), Vanguard Small Cap Value ETF (VBR).      XSVM VIOV IWN DFSV AVUV VBR   Inception 3/3/2005 9/7/2010 7/24/2000 2/23/2022 9/24/2019 1/26/2004   Expense Ratio 0.36% 0.15% 0.24% 0.31% 0.25% 0.07%   AUM $775.54M $1.44B $11.65B $2.84B $10.87B $55.51B   Avg Daily Volume $3.86M $5.11M $209.74M $12.33M $63.65M $108.14M   Holdings 118 464 1418 982 765 859   Top 10 14.94% 8.07% 5.05% 6.64% 8.82% 5.67%   Turnover 86.00% 45.00% 32.00% 11.00% 7.00% 16.00%   Click to enlarge Invesco S&P SmallCap Value with Momentum ETF is the smallest fund of this group, the least liquid, the most concentrated, and it has the highest fee and turnover. The next chart plots total returns, starting on 3/1/2022 to match all inception dates. The two actively managed ETFs AVUV and DFSV are leading, while XSVM is in the middle of the pack. XSVM vs. competitors (Seeking Alpha)  Comparison with my Dashboard List model  The Dashboard List is a list of 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. 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, 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 XSVM performance since 4/1/2005 with the Dashboard List model, with a tweak: the list is reconstituted once a year to make it comparable with a passive index.     Total Return Annual.Return Drawdown Sharpe ratio Volatility   XSVM 419.15% 9.02% -62.57% 0.46 22.21%   Dashboard List 640.04% 11.07% -55.78% 0.61 18.68%   Click to enlarge Past performance is not a guarantee of future returns. Data Source: Portfolio123 The Dashboard List outperforms XSVM by 2% in annualized return and shows a lower risk measured in drawdown and volatility. However, ETF performance is real, and the model simulation is hypothetical. Price to Book: a risky concept of value Most value indexes have two weaknesses, and this one 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 and industries. Obviously, they are not: my S&P 500 monthly dashboard shows how valuation and quality metrics may vary across sectors. A consequence is to overweight sectors where valuation ratios are naturally cheaper. A few ETFs have a more sophisticated approach of value, like Fidelity Value Factor ETF (FVAL), reviewed here, and some actively managed value funds like AVUV and DFSV. The second weakness comes from the price/book ratio (P/B), which adds some risk in the strategy. Historical data show that a large group of companies with low P/B has a higher volatility and deeper draw-downs than a same-size group with low price/earnings, price/sales or price/free cash flow. 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 1/1/2024 with elements in equal weight.     Annual Return Drawdown Sharpe ratio Volatility   Cheapest quarter in P/B 9.86% -73.88% 0.47 23.25%   Cheapest quarter in P/E 10.63% -63.06% 0.55 19.88%   Cheapest quarter in P/S 11.60% -68.78% 0.54 22.70%   Cheapest quarter in P/FCF 12.65% -64.24% 0.62 20.63%   Equal Weight Index (RSP) 9.16% -59.92% 0.5 17.55%   Click to enlarge Data calculated with Portfolio123. This explains my choice of not using P/B in my Dashboard List model. Takeaway  Invesco S&P SmallCap Value with Momentum ETF selects and weights small-cap stocks based on 3 valuation ratios and a momentum score. The fund is well-diversified across sectors and holdings. Not only valuation is attractive, but fundamental growth rates are also superior to the benchmark. However, historical performance is disappointing: it has failed at bringing significant excess return or risk reduction relative to its parent index in 19 years, and it has been average among peers with lower fees over the last 2 years. Moreover, its liquidity is significantly lower than competitors, so it is not really attractive as an instrument for swing trading or tactical allocation.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2430830783"}