FVAL: ETF Best Of Breed Value

FVAL strategy and portfolio

The Fidelity Value Factor ETF (NYSEARCA:FVAL) tracks the Fidelity US Value Factor Index since 2016-09-12. It has 129 stocks, a payout yield of 1.64%, a total expense ratio of 0.29% and net assets worth about $515 million.

According to the prospectus, the underlying index “is designed to reflect the performance of stocks of large and mid-cap US companies that have attractive valuations.” More specifically, it is based on a score combining four factors with equal weight: Free Cash Flow Yield, EBITDA to Enterprise Value, Tangible Book Value to Price, Forward 12 month Earnings to Price (based on estimates). For the banking sector, only the last two factors are taken into account (Tangible Book Value to Price and Forward 12 month Earnings to Price).

FVAL invests exclusively in American companies and mainly in the large cap segment (75%). As expected, FVAL is cheaper than the S&P 500 Index (SPY) at the usual valuation ratios shown in the following table.

Source: Loyalty

FVAL currently holds 129 shares. The top 10 holdings represent 30.3% of the portfolio’s value. The following table lists their weightings and valuation ratios. Exposure to each of the two major holdings is 6-7% (Apple (AAPL) and Microsoft (MSFT)), but the risk in all other stocks is quite low.

Ratios: Portfolio123

The sector composition is very close to the S&P 500:

Since its inception in September 2016, FVAL has slightly underperformed the S&P 500. However, the difference in annualized return is not very significant. The maximum decline and volatility (measured as the standard deviation of monthly returns) indicates moderately higher risk.

Data calculated with Portfolio123

The following chart plots the equity value of $100 invested in FVAL and SPY since FVAL’s inception. The two funds were on par until the March 2020 market crash, then FVAL started to lag behind the benchmark.

Comparing FVAL with other large-cap value ETFs

The following table compares FVAL’s performance since inception with four other large- and mid-cap value ETFs by different issuers and based on different underlying indices. FVAL leads the pack in terms of yield and risk-adjusted performance (Sharpe ratio).

Why is FVAL better? Value indices generally have two flaws. The first is to rank all stocks on the same criteria. This means that valuation ratios are considered comparable across sectors. Obviously, they are not: you can read my monthly dashboard here for more details on this subject. One consequence is to favor sectors where valuation ratios are naturally cheaper, notably financials. FVAL calculates the value score in a different way for the banking sector. The bias across all sectors and industries is not completely fixed, but at least it is reduced in the most problematic sector.

The second shortcoming of value indices stems from the price-to-book (P/B) ratio. Speaking of probabilities, a large group of companies with a low P/B contains a higher percentage of value traps than a group of the same size with price/earnings, price/sales, or price/cash flow. available low. Statistically, such a group will also have higher volatility and larger price declines. The following table shows the return and risk measures of the cheapest quarter of the S&P 500 (125 stocks) measured in price/pound, price/earnings, price/sales and price/free cash flow. The sets are reconstituted annually between 01/01/1999 and 01/01/2022 with elements of equal weight.

Data calculated with Portfolio123

FVAL uses an inverse P/B (Tangible Book Value to Price) ratio, but it weighs only 25% of the value score, which is lower than other value indices.

This also explains my choice not to use P/B in my dashboard list template (more on this at the end of this article).

Take away

FVAL follows a systematic value strategy based on four valuation ratios in a large and mid cap universe. Its sector structure is very similar to the S&P 500, while other value ETFs are generally overweight financials. Since its inception in 2016, it has slightly underperformed the S&P 500, which is not a deal breaker: most value-oriented strategies and funds have lagged over this period. However, FVAL beat other value ETFs by a significant margin. The underlying index implements a smarter concept of value by giving a lower weight to the P/B ratio and calculating the score in a different way for banks. FVAL is one of the most attractive large-cap value ETFs for long-term investors. It can also be useful in a tactical allocation strategy alternating between value and growth depending on market conditions. FVAL has the maximum rating of 5 stars from Morningstar.