SPYV: Performance Will Be Inferior To The S&P 500 Index In The Long Run

ETF Overview

SPDR Portfolio S&P 500 Value ETF (NYSEARCA:SPYV) owns a portfolio of value stocks in the S&P 500 index. These stocks have lower P/E, P/B, and P/S ratio than the S&P 500 index. SPYV has an expense ratio of 0.04%. This is comparable to its peer fund S&P 500 Growth ETF (SPYG), which has the same expense ratio. Due to SPYV’s inferior growth characteristics, SPYV’s performance will likely lag SPYG and the S&P 500 index in the long run. The fund’s valuation also appears elevated relative to its historical average. Therefore, we think investors may want to wait on the sidelines or seek other funds instead.

Fund Analysis

SPYV has done well in the past 2~3 years

Let us first review how SPYV has performed in the past 2~3 years. The fund has done quite well since reaching the cyclical low in October 2022, delivering a total return of 44.1%. This return was quite good, but unfortunately not as strong as its peer funds. As can be seen from the chart below, SPDR S&P 500 ETF (SPY) and SPYG delivered total returns of 51.2% and 56.6% respectively.

While SPYV may have underperformed since October 2022, the fund has done much better than SPY and SPYG in the first 10 months of 2022. As can be seen from the chart below, SPYV only declined by 16.3%. In contrast, SPY and SPYG declined by 24.7% and 32.2% respectively.

SPYV is tilted towards value

Now, let us look at SPYV’s fund style. As SPYV’s name suggests, the fund is tilted towards value. The fund basically selects stocks from the S&P 500 index that exhibit strong value characteristics such as low price to book value ratio, low price to earnings ratio, and low price to sales ratio. Based on these metrics, it is not difficult to imagine that SPYV’s performance will likely outperform its peers in a bear market as the valuations are already quite compressed relative to these funds. One downside of owning this fund is that stocks with lower valuations typically are stocks that have lower sales and earnings growth outlooks than growth stocks. Therefore, it is also not difficult to imagine that these value stocks will likely underperform SPY and SPYG in the long run.

In fact, SPYV’s allocation to growth sectors is quite limited. As can be seen from the chart below, growth sectors such as information technology, and consumer discretionary only represent 8.1% and 5.2% of SPYV’s total portfolio. In contrast, the S&P 500 index’s exposure to technology and consumer discretionary stocks is 30.9% and 9.9% respectively. SPYG’s exposure to these two sectors is even higher due to its even stronger growth characteristics. Information technology and consumer discretionary sectors represent 49.0% and 13.5% of SPYG’s portfolio, respectively.

Its long-term performance will most likely lag growth funds

SPYV’s long-term performance has indeed been impacted by its lower exposure to growth stocks. In fact, it has consistently lagged its two peer funds, SPY and SPYG. Below is a chart that compares the total return of SPYV, SPY, and SPYG in the past 2 decades. As can be seen, SPYV delivered a total return of 413.8% since 2004. In contrast, SPY and SPYG delivered better total returns of 585.9% and 717.5% in the same period.

SPYV has lower downside risk and volatility

While SPYV may have lagged its peer funds in the long run, the fund has typically done better in bear markets. Below is a chart that compares how far SPYV, SPY, and SPYG declined from the high in the past 30 years. As can be seen, SPY’s decline was usually much lower than SPY and SPYG. SPYV also has much lower volatility. In fact, its 5-year average beta of 0.88 is lower than SPY’s beta of 1, and much lower than SPYG’s beta of 1.12.

IS SPYV’s valuation expensive or cheap?

While SPYV may have a lower valuation than its growth peer fund SPYG, is its valuation really that cheap? Here, we will compare SPYV with its peers, and with its own historical average. Below is a chart that shows the forward P/E ratio of the S&P 500 value index, the S&P 500 index, and the S&P 500 growth index in the past 20 years. For simplicity, we will simply refer to the names of these three funds. As can be seen from the chart below, SPY and SPYG almost always have higher average forward P/E ratios than SPYV regardless of a bear or bull market. SPYV’s valuation is always "cheap" relative to these two funds. Therefore, it is not important to compare SPYV’s valuation with SPY and SPYG. However, we can check whether SPYV’s valuation is expensive or not if we compare it to its own historical average. As the chart below shows, SPYV currently has an average forward P/E ratio of 15.8x. We may not say this as very expensive as it is not near the peak of 18x in 2020/2021. However, it is elevated relative to its historical average, which has usually been between the range of 11x and 16x in most of the past 20 years.

Investor Takeaway

SPYV will likely continue to deliver positive returns in the long run. However, as we have discussed in our article, SPYV’s long-term performance will likely be inferior than the broader market and the S&P 500 growth index due to its inferior growth characteristics. Therefore, it may not be the best fund to own if your goal is to seek strong total returns in the long run. In addition, its valuation is elevated relative to its past valuation. Hence, we think investors should wait or seek other funds instead.

Additional Disclosure: This is not financial advice and that all financial investments carry risks. Investors are expected to seek financial advice from professionals before making any investment.