SLYV: A Cheap Way to Express Your Small-Cap Value Bias (NYSEARCA:SLYV)

SPDR S&P 600 Small Cap Value ETF (NYSEARCA:SLYV), launched on 09/25/2000 by State Street Global Advisors, Inc. and managed by SSGA Funds Management, Inc., is an ETF that tracks the performance of the S&P SmallCap 600 Value Index.

This fund’s approach is based on identifying the most undervalued stocks in the small-cap segment of the US equity market, and its methodology for doing so is based on several relevant indicators. It also gives us a chance to see how it has performed against different alternatives over more than two decades, and the results are consistent with empirical research on the value-performance spread. Being small-cap tends to be riskier than owning a total market portfolio or the S&P 500, but if one is in the wealth-building phase and has conviction in the value approach, SLYV could also work as a basic option.

Methodology

SLYV uses a sampling strategy to gain exposure to the S&P SmallCap 600 Value Index, which has certain selection criteria.

First, it includes stocks with a market capitalization between $850 million and $5.2 billion. It also selects stocks based on liquidity criteria, such as an annual dollar value traded with a float-adjusted market capitalization ratio of at least 0.75, a minimum of 250,000 shares traded in each of 6 months preceding the selection date. , and a public float of at least 10%. Each company should also have positive TTM earnings as well in the last quarter. The index then uses a ranking system to select the most undervalued stocks based on book value to price ratio, earnings to price ratio and sales to price ratio. Finally, it assigns weights according to the market capitalization of each component and rebalances annually.

Performance and cost

Since its inception, SLYV has returned 10.54% per year, while the benchmark reflected an annualized return of 10.18%. Moreover, it outperformed its long-term vanilla counterpart by a substantial margin:

The outperformance becomes more pronounced when you compare SLYV’s performance to the large-cap segment:

I think it’s also important to highlight the difference in performance seen between SLYV and its growth counterpart, as it serves as a good reminder that the best explanation for why value outperforms over the long term is the same as why growth has poor performance; market expectations seem irrationally based only on past performance and express disappointment when growth stocks fall short of expectations and surprise when value stock issuers deliver better than expected results.

Now, the same reason that best explains the performance of funds like SLYV is the same reason I expect these funds to continue to deliver the value they have so far. The P/E ratio of this ETF is currently 15.14 and the price-to-record is 1.41; compared to the other relevant funds we mentioned, SLYV’s current portfolio is undervalued.

Finally, while the turnover ratio was recently reported at 46%, SLYV’s expense ratio is only 0.15%, which, in the context of its past performance and its smart-beta offering, makes the investment in it to be cheap.

risks

The most important risk that comes with funds like SLYV is the tendency to be small-cap rather than value. Undervaluation based on indicators such as price to book value, earnings, sales, etc., although it may reflect the market’s view that there are risks, there is no evidence that it represents real risks. It appears to be the size factor that makes funds like SLYV riskier than broad market index funds. Severe price swings are more commonly seen in this segment of the stock market, and declines can be extremely stressful during economic downturns when you own small-cap stocks. The only ways to manage this risk are to either have a very long investment horizon and a high conviction in the value approach, or not treat SLYV as a core option for your portfolio.

The other risk you should be aware of is concentration risk; right now, the ETF has 24.77% of funds allocated to companies operating in the financial sector. Although unlikely, if interest rates rise higher, SLYV may prove to be more sensitive to this change.

Verdict

Bottom line, there’s not much not to like when it comes to SLYV. It is the most classic form of smart-beta value fund and provides a track record that is actually relevant to the value versus growth debate. Therefore, I write it a buy.

what do you think? Do you prefer another value ETF, use a completely different approach, or invest as an agnostic these days? Let me know below! Thank you for reading.