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Summary The value portfolio offers an academically proven investment model for investors. P/E, P/B and P/S are well known and commonly used financial metrics. Even though this ETF seems a bit boring, based on an abundance of academically proven factors I would prefer this ETF over an index ETF following the S&P 500. Invesco recently launched new ETFs, one of them I covered in an earlier article: ” A New ETF In Town: The PowerShares S&P 500 Momentum Portfolio (NYSEARCA: SPMO )”. This is part 2, discussing the PowerShares S&P 500 Value Portfolio (NYSEARCA: SPVU ), which is an interesting addition to the S&P 500 momentum portfolio. Both momentum and value are 2 investment strategies which have received wide coverage in the academic world and the world of finance practitioners. The SPVU tracks the S&P 500 enhanced value index which is focusing on 100 S&P 500 companies with the greatest value score calculated based on fundamental ratios: book value/price ratio, earnings/price ratio and sales/price ratio. SPVU: The Value Portfolio Source: ETFdb The issuer of this new ETF is Invesco, a large independent investment management company incorporated in Bermuda which has many other ETFs to offer. The expense ratio of 0.25% is a very reasonable number . With 2.5 million assets under management it’s not a large ETF. Value Portfolio: Selection Strategy This ETF is a so called smart-beta ETF and will spend at least 90% of its total assets in the S&P 500 Enhanced Value Index. The selection process for 100 stocks is based on the book value/price ratio, earnings/price ratio and sales/price ratio: The book value to price ratio is calculated by using the company’s latest book value per share divided by its price. The earnings to price ratio is calculated by using the company’s 12-month earnings per share divided by its price. The sales/price ratio is calculated by using the company’s 12-month trailing 12-month sales per share divided by its price. A value score is then calculated. The best 100 stocks are selected for the underlying index. Value: A much covered topic in the world of academia The book value to price ratio is an asset factor which has been widely covered in academics. For example, a P/B of 2 means that the stock is priced twice as much as it could sell for. It is also used to explain the portfolio return of portfolio managers, in for example academic models such as the Fama and French asset model . Generally, a firm with a lower book value to price ratio outperforms a firm with a higher book value to price ratio. A reason for this could be that a firm with a lower ratio indicates a distressed stock which makes it look cheap. Yet, if you believe in the efficient market hypothesis , a cheap stock could only be a cheap stock because investors consider it risky. The price to earnings ratio (the inverse of the earnings to price ratio) is one of the most widely used fundamental ratios in the financial markets. For example a P/E of 20 can indicate that you pay $20 for $1 of earnings. If then compared to numerous other investments, commonly it seems like a better deal if you pay the least for $1 of earnings. It has been proven, time and time again, that investment in a lower P/E related firm outperforms investments which yield a higher P/E ratio . Nevertheless, the world of academia has further expanded on price/earnings ratios recently, for example, in the discrepancy between negative P/E firms and positive P/E firms. Athanassakos (2014) concluded in his research that certain negative P/E firms indicate high forward stock returns, even though past price/earnings ratio research most of the time excluded negative P/E firms. I believe future research in the world of financial academia will continue in this path. The price to sales ratio is the third metric which is used in this ETF to value stocks. A lower P/S is preferable over a higher P/S ratio. Furthermore, it’s one of the best metrics used for companies which are a in a so called ‘turnaround’ modus, where the firm has lost earnings (negative P/E and no dividend for example), the P/S ratio offers the opportunity to compare firms. Additionally, the P/S also has been covered numerous of times in the world of academia where the outcome and conclusion is often very similar to each other. The price to sales ratio offers a good (to sometimes even better) explanatory power in explaining stock returns in comparison to for example the book-market value of a stock. All in all, this ETF follows 3 well known financial metrics which have been proven in the world of academics, decade after decade. Conclusion In addition to the momentum strategy ETF I consider it highly likely that this ETF will outperform the stock market as a whole over an extended period of time. This assumption is based on the abundance of research on the book/price, price/earnings and sales/price ratio in the world of academics. Yet, as the world of academia is moving forward, I would not be surprised to see updated Value ETFs where new metrics/findings will be implemented. I assume based on the current findings in academia that they will offer better risk/reward premiums to investors in comparison to this ETF. The world of negative P/E firms has yet to be uncovered to the same extent as positive P/E firms. Disclaimer: This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice. You are responsible for your own investment decisions. This information is not a recommendation or solicitation to buy or sell securities, nor am I a registered investment advisor. Scalper1 News
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