BUSA: New Actively Managed Large-Cap Value ETF Not Worth The Cost

seekingalpha07-18

BUSA is a relatively new actively managed large-cap value ETF with $150 million in assets and a 0.60% expense ratio.Selecting stocks based on the principles of Benjamin Graham and David Dodd, BUSA's ...

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GLOBAL VALUE PORTFOLIO \"AD\" (HKD) INC","LU0477156953.USD":"HARRIS ASSOCIATES US VALUE EQUITY \"RE\" (USD) ACC","BUSA":"BRANDES U.S. VALUE ETF","LU0162691827.USD":"BGF US BASIC VALUE \"A4\" INC","LU2236285917.USD":"ALLIANZ GLOBAL INCOME \"AMG\" (USD) INC","LU0289960550.SGD":"AB FCP I - GLOBAL EQUITY BLEND PORTFOLIO 'A' (SGD) ACC","BK4501":"段永平概念","LU0310800965.SGD":"FTIF - Templeton Global Balanced A Acc SGD"},"translate_title":"BUSA：新的主动管理型大盘价值ETF不值得","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"VTV":1,"IWD":1,"FELV":1,"FDN":1,"BUSA":1,"SPYV":1},"content_text":"BUSA is a relatively new actively managed large-cap value ETF with $150 million in assets and a 0.60% expense ratio.Selecting stocks based on the principles of Benjamin Graham and David Dodd, BUSA's Investment Committee has designed a portfolio with a forward P/E that's incredibly attractive versus its category peers.However, on a sector-adjusted basis, BUSA's value features aren't much better than low-cost index funds like IWD, SPYV, and VTV. BUSA also makes diversification, quality, and sentiment sacrifices.BUSA only launched in October 2023, so it's difficult to say how its focused strategy might play out over the long run. However, based on today's composition, I don't see a reason to own it.   Devenorr Investment Thesis The Brandes U.S. Value ETF (BATS:BUSA) is an actively managed large-cap value fund with $150 million in assets under management and a 0.60% expense ratio. Operating under the principles of Benjamin Graham and David Dodd, an Investment Committee at Brandes Investment Partners selects stocks based on their estimated intrinsic value, derived from metrics like a company's price-earnings and price-book ratios. The strategy is well-known to value investors, but my fundamental analysis reveals diversification, quality, and sentiment issues that offset BUSA's value edge. Therefore, I recommend readers avoid BUSA until it becomes more established. BUSA Overview Strategy Discussion BUSA is led by four industry veterans with a combined 106 years of experience, including 97 years with Brandes. They are as follows: Brandes Investment Partners These individuals form the Global Large-Cap Investment Committee. Together, they are responsible for selecting stocks, which reduces key-person risk and increases the chances of consistent strategy execution. The Brandes Investment Partners website also notes that the firm is independent and employee-owned, free from outside influences. BUSA does not track an Index. Instead, managers select stocks according to their prices relative to their estimated intrinsic values, derived using ratios such as price-earnings, price-book, price-cash flow, debt-equity, and dividend-price. Furthermore, the website notes value securities tend to be out of favor and that the strategy requires patience. Put differently, selections often have weak price momentum, and it's not an ETF where you can expect frequent trades. Although it's still early, BUSA logged only a 1% turnover rate for the three months ending December 31, 2023, per its semi-annual report. Performance Analysis Since its inception, BUSA has gained 23.10% compared to 22.50% for the iShares Russell 1000 Value ETF (IWD), its stated benchmark. As shown below, the SPDR S&P 500 Value ETF (SPYV) and the Vanguard Value ETF (VTV) delivered slightly better returns of 25.01% and 24.44%, respectively. Seeking Alpha There's not much to go on, but for the first six months of 2024, BUSA gained 8.02%, which ranked #40/108 in the large-cap value category. It's better than average, but the best performers in this category were dividend-focused ETFs, and BUSA certainly does not present itself as an income fund. Its selections yield 2.08%, similar to the IWD, SPYV, and VTV, but its 0.60% expense ratio means shareholders would only net approximately 1.48% at current prices. In addition to the passive ETFs listed above, I will compare BUSA with the Fidelity Enhanced Large Cap Value ETF (FELV). On November 20, 2023, Fidelity converted its suite of actively managed enhanced mutual funds, and along with a lower 0.18% expense ratio, FELV and its predecessor delivered solid returns since May 2007, outperforming IWD by about 27%. Morningstar BUSA Analysis Sector Exposures and Top Ten Holdings The following table highlights sector exposure differences between BUSA, IWD, SPYV, VTV, and FELV. BUSA's prospectus noted potential high allocations to Financials and Health Care, and these sectors account for 49.25% of the portfolio. Industrials and Technology are next at 13.45% and 10.94%, and the ETF has minimal or no exposure to Consumer Discretionary, Consumer Staples, Materials, Real Estate, and Utilities. The Sunday Investor The other four ETFs are better balanced, with at least 2.50% allocated to each sector. This should lead to more consistent, but not necessarily better, returns. Evidently, BUSA's Investment Committee sees stocks in the Financials sector as the most undervalued, and they may be right. On Monday, Steven Cress, Seeking Alpha's Head of Quant Strategies, named Wells Fargo Company (WFC) as a top pick in a potential Trump 2.0 administration, citing the potential for \"less stringent capital and liquidity rules\". Wells Fargo is BUSA's #2 holding, and the Diversified Banks sub-industry is its most significant, representing 10.26% of the fund. Brandes Investment Partners BUSA Fundamentals By Sub-Industry The following table highlights selected fundamental metrics for BUSA's top 25 sub-industries, totaling 81.75%. With a 1.01 five-year beta, it is higher than these peers and the 0.96 category average, but it's far from what \"pure\" value ETFs offer. BUSA's $169 billion weighted average market cap is also in the same ballpark as these peers, so they are reasonable comparators and suggest BUSA is attempting to compete directly as a core holding. The Sunday Investor Here are three additional observations: 1. BUSA's growth rates look competitive. Health Care Distributors, Property & Casualty Insurance, and Aerospace & Defense stocks contribute positively to the fund's 7.63% one-year estimated earnings per share growth rate and help offset weakness in Pharmaceuticals and Integrated Oil & Gas. Diversified Banks also offer more earnings growth potential than Regional Banks, a setup that's helped returns. On a weighted average basis, BUSA's Diversified Banks gained 22.45% year-to-date compared to 10.08% for Regional Banks. FELV also has solid sales and earnings growth rates, but it's better diversified, with only 61.78% of assets in its top 25 sub-industries. Diversification is an area where BUSA struggles if its objective is to poach investors from plain vanilla funds like IWD, SPYV, and VTV. The risk of certain sectors like Financials and Health Care underperforming and managers not adapting to changing market conditions, as is implied by the fund's research philosophy and portfolio turnover rate, might always exist. 2. While BUSA's diversification poses an additional risk, the ETF does deliver on its promise of holding cheaply-valued stocks. BUSA trades at 15.11x forward earnings using the simple weighted average method and 13.57x using the harmonic weighted average method, both of which rank in the top decile of all the large-cap value ETFs I track. However, much is structure-related, as stocks in the Financials sector typically have low valuations. Using Seeking Alpha's sector-adjusted Factor Grades, I derived a 4.21/10 Value Score, which is only slightly above average. It's still superior to the four peers listed above, which have scores ranging between 3.38/10 and 3.63/10, but BUSA's value advantage is smaller from this perspective. 3. BUSA has a sector-adjusted 8.35/10 profit score, which ranks only #91/109 in the large-cap value category. This score is disappointing since high-quality stocks tend to outperform over the long run. In addition, I worry that the Investment Committee has too much of a contrarian mindset, evidenced by its weak 5.77/10 EPS Revision Score. This score, which measures consensus earnings estimates changes, indicates poor analyst sentiment, which can be a significant headwind even if the underlying businesses are strong. Investment Recommendation  BUSA doesn't offer a good enough mix of diversification, growth, value, quality, and sentiment to justify its 0.60% expense ratio in my opinion. I expect the ETF to overweight Financials for the foreseeable future, which might work out in a Trump 2.0 administration. However, I also don't anticipate the Investment Committee will react quickly should market conditions change, which is the main draw of an active strategy. To be sure, it's still early to say for certain this will be the case, but for readers today, the most prudent thing to do is to reserve judgment until we get more information. Until then, FELV is a better-diversified choice with at least an equally attractive factor mix and a much lower expense ratio, and it is my pick over BUSA.","kind":null,"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":"4.29.1","shortVersion":"4.29.1","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/2452159381"}