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True Value Oriented ETFs - Help me


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What portion of your portfolio is in ETF's ?  

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  1. 1. What portion of your portfolio is in ETF's ?

    • 0-10%
    • 10-25%
    • 25-50%
    • 50-75%
    • 75-100%


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Guys,

I was trying to research and find some true value oriented ETF's out there which could potentially help me automate a portion of a my investing at a lower cost, for unrelated personal reasons. Do any of you have any experience with it or truly like anything that out there? If so what are they?

 

I am basically looking for ETF's which base their selection on fundamental non-price based qualitative factors and weigh the selections based on some proxy for potential payoff (difference between price and estimated intrinsic value). I am not too comfortable with market cap based approaches given their propensity for overweighting whatever is popular in a given period.

 

I am looking at a fund like LEXCX where the constituents were selected in the 1920's and not tinkered around with after except for mergers/acquisitions and spinoffs. That has beaten the SP500 comfortably over a long period of time. The idea was to find something like that today for the next 100 years. Want it in an ETF format because, I don't want to deal with forced dividends/taxes etc unless I really need to.

 

Any thoughts and help would be appreciated.

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that fund underperformed the S&P 500 from 1970-2000. It also underperformed the average large value fund from inception to 1984. Sure, I'm cherry picking dates but the point is that this has trailed for very, very long periods of time.  Why would anyone hold on to it when it's underperformed for 30 or nearly 50 years?

 

 

There are quite a few "value factor" etfs or an equal weight S&P 500 like RSP. Cambria might have something too:

 

http://www.cambriafunds.com/etfs.aspx

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Qualitative?  I don't know, but if you search around for ETFs and you will probably find many times we've discussed tons of related ETFs.  Maybe MOAT or DHVW.  I think they use qualitative/analyst estimates, which are generally inferior, according to the quants.  The S&P ones below have an implicit qualitative factor because the S&P committee selects them and they have a quality screen of financial viability built in.

 

Davis funds has launched some ETF versions of their old school mutual funds (DUSA and DWLD).

 

I'm still not 100% sold alternative weighting adds to after tax and after fee returns versus a cheap value ETF like VOE, IUSV or VBR (but those etfs would be expected to have lower "tracking error"/better performance in a momentum/growth market due to the cap weighting).

 

RPV, RFV, PRF, PRFZ, FNDB, DVP, QVAL, RSP, DTD, SYLD are pretty much all alternatively weighted; some of them have pretty long track records at this point.

 

Also, remember growth has SMOKED value (as defined in the S&P Barra system) since the market bottom.  So maybe the worst 10 year track record and lowest expense ratio is your dream date.

 

Those are all US centric. Foreign ones are a little harder, but not impossible, to find.

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Take a look at QVAL here:  www.alphaarchitect.com

 

They have a very unique tool http://tools.alphaarchitect.com/ "visual active share" that provides complete transparency as to what's really in the ETF you own.  You'll need to sign up to access.

 

*Long QVAL

 

I own some QVAL too.  Admittedly performance has been quite shitty inception to date; getting beat by pretty much every value strategy listed above, the market, etc.  Portfolio visualizer regressions also seem to indicate it has more exposure to the AQR quality factor than value as defined by either AQR or French/Fama, but its still early I suppose.  I really don't like that they took down their benchmark comparison to the russell 1000 value or whatever they used to have up there before it started smoking them.  Also didn't like that the pumped out an article touting performance when they had a good quarter or whatever to start.

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Take a look at QVAL here:  www.alphaarchitect.com

 

They have a very unique tool http://tools.alphaarchitect.com/ "visual active share" that provides complete transparency as to what's really in the ETF you own.  You'll need to sign up to access.

 

*Long QVAL

 

Thanks menlo.

I do like the QVAL approach somewhat. The approaches he mentions in his book seem to have a lot of outperformance. I need to dig deeper into this, but do you know whether this ETF tries to implement some of those ideas?

 

Most of the other alternatively weighted funds mentioned, seem to have too many securities in them for weighting to have an impact. The Davis funds seem to be a good candidate to explore but need to see whether it is a rule based selection or if there is a human touch

 

And regarding LEXCX, I think there is a certain amount of comfort in predictability of portfolio. Knowing what my fund holds and knowing that it won't change too much if I ignore it for a while is worth something.

 

By the way, would be interesting to know how many of you use ETF's in your portfolio and if so to what extent.

 

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The first fundamentally-weighted ETF was Powershares FTSE RAFI US1000 launched in December 2005,

 

https://www.invesco.com/portal/site/us/financial-professional/etfs/product-detail?productId=PRF

 

Six months later Wisdom Tree launched 20 ETFs based on dividends and in 2007 6 more based on earnings. Examples are EZY, DLN, and WTEI.

 

I have never looked at them but these have been around long enough you can see if they have been outperforming capitalization-weighted indexes.

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With a classic value ETF like QVAL, you are paying 50-80bps and the ETF then holds stuff like Cisco, Apple, Wyndham, HP (last I checked).

 

Compare that to the simple S&P500 ETF tracker from Vanguard. Yes, you hold the S&P. But you pay 5bps (10-15x less). And by the way, for some weird reason, it keeps outperforming QVAL and its ilk by a significant margin.

 

Why do people keep complicating things?

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Didn't I mention all of these?  Just FYI IUSV has changed indexes a couple of times since inception.  Recently changed to S&P 900 Value which I prefer to the old MSCI index it was tracking which basically used book value.

 

QVAL isn't a classic value index, but yeah odds are none of these beat IUSV or VOE or VBR, etc.  I do think odd are that all of those beat SPY, based on historical performance and the reasons for that performance.

 

PRF has beat S&P and VTI inception to date, last I checked.  DTD is a little under but value has underperformed.  I think it has lower volatility. I pretty much buy the arguments that those are basically weak value tilts with less "tracking error," but there is something compelling in the argument that they will dynamic balance into value when the price and fundamentals diverge a lot (value factor stocks are even more relatively cheap).

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You could look at iusv.  It is hugely diversified and has an extremely low expense ratio at .05%.  It looks like it has beaten the S&P since inception in 2000.  I have a decent chunk in it.  Like everything else in the US it is quite expensive right now.

 

It has, although (like so many value oriented things) it has underperformed since 2007. 

 

Edit: what I mean is, 2000 stands out in stock market history and therefore might not be a good starting date for comparing a value strategy vs. the overall market.

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IUSV also doesn't even track that index anymore (it literally changed early this year), as I have said above.  But both of the relevant indexes have been around a lot longer than 2000.

 

Mohnish Pabrai has an ETF now too (JUNE).  It combines buybacks, spin-off and cloning.  I think buybacks is the largest portion (PKW can get that done for you).  I don't like that it selects the largest positions among several great investors (as I understand it based on his talks), the largest positions have been shown statistically to underperform.  Theory is they are the most appreciated, but we will see how it performs.

 

OP the davis funds are just the mutual funds in a better tax wrapper and with a lower .6 ER.  If you don't want to do one of the vanilla funds like the vanguards or iusv, take a look a close look at the guggenheim ones.  They use S&P slices and weight according to cheapness based on three metrics, have pretty cheap expense ratios and relatively long track records.  They also have high exposure to the value factor if you do regressions (with either Fama French or AQR data) and you can just look at the industry weightings to see they are really weighted to cheap stuff.

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IUSV also doesn't even track that index anymore (it literally changed early this year), as I have said above.  But both of the relevant indexes have been around a lot longer than 2000.

 

 

Yep, sorry, I was looking at the index not the etf.  Since the inception of the index in 1995 the TR has been 8.7% vs. the S&P at 9%.  I've no idea if the index methodology has been tweaked.

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Didn't I mention all of these? 

 

You did and I'm not trying to steal your idea but just wanted to add my 2 cents.

 

It has, although (like so many value oriented things) it has underperformed since 2007. 

 

Edit: what I mean is, 2000 stands out in stock market history and therefore might not be a good starting date for comparing a value strategy vs. the overall market.

 

Look at the valuations of FB,AMZN,TSLA, sure not as extreme as 2000 but there is still a lot of skew in the market.  Some areas are more bubbly than others.  I think there is still an opportunity to out-perform go forward albeit not the same divergence as in 2000.  I am not too worried about changes to the underlying index.  As long as the expenses are low and it is diversified and it is avoid the bubbly areas that is all I am after.

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Not trying to talk you out of it at all.  It looks very interesting.  But, the growth skew is nowhere near as extreme today as it was in 2000.  In fact, if anything is exceptional today it is that valuations are high across the entire market, which is consistent with the fact that the discount rate is at an all time low.

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It is a good link, the growth/value performance since 08 was interesting (3:40).  I like that he is shifting to growth because value just isn't doing it these days.  He can follow the momentum, I will try to do the opposite.

 

Here is another one, https://www.fidelity.com/learning-center/trading-investing/trading/value-investing-vs-growth-investing.

 

If you look there, all of the value indexes out-performed over the last 26 years vs their growth peer, albeit by small margins.  However, large value significantly under-performed since 2008 vs growth.  It looks like things are tighter though for small and mid-cap.

 

Who knows how much merit this type of analysis has but given how bleak the return outlook is I am looking for any edge I can find.  I am just a bit more comfortable holding a value index if we go into a downturn.

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Mohnish Pabrai has an ETF now too (JUNE).  It combines buybacks, spin-off and cloning.  I think buybacks is the largest portion (PKW can get that done for you). 

 

BTW the royalties on these ETFs would blow your minds. I can see why Pabrai wants a piece.

 

Paying for any of these ETFs that cost 40-90 bps more than the SPY is flat-out crazy, in my view, especially if you plan on holding the ETF for decades. That fee difference will compound and destroy your cumulative.

 

The only ETF / MF where that level of fees could be justified is something like Greenblatt's Gotham long/short (e.g. 170 long, 70 short). But expense ratio there appears to be 2%, which is still way too high. 

 

 

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Mohnish Pabrai has an ETF now too (JUNE).  It combines buybacks, spin-off and cloning.  I think buybacks is the largest portion (PKW can get that done for you). 

 

BTW the royalties on these ETFs would blow your minds. I can see why Pabrai wants a piece.

 

Yeah, no doubt.  I've got a little position in WETF because of that.  Also, looking at IVZ and SPGI, but IVZ doesn't own the IP for most of their indexes, but I think powershares will do really well over time.

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One other one I am considering is VIG. Yes, it has probably been mentioned already and investing in it will be like watching paint dry but nevertheless it is promising.  I will lay out a quick thesis for my own notes if nothing else.

 

- Low expense ratio .1%.

- Companies with history of increasing dividend.

- Results in a list of stable high quality US companies.

- Neck and neck with S&P since inception, I think it is very marginally ahead but we'll call it a tie.

- Down 27% in 2008 vs 37% for S&P 500.

- Under-performed S&P for the past 2-3 years.

- Grantham has high quality US stocks as being one of the more promising stock areas in his 7 year forecast.  Seem to recall there being another forecast with similar conclusion.

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