Throughout my career, I’ve heard professional investors assert that index funds are fine for bull markets but in volatile-to-down markets, active management will outperform. SPIVA (S&P vs. Global) published research available from S&P Global has demonstrated that this was not true for actively managed mutual funds for 2022, and less true for the 2020-2022 period. I take that with a grain of salt because it compares an index to traditional mutual funds that have a costly structure.
In my article available on the ValuEngine website, I explain why the redeem-at-distributor model costs investors in the average equity mutual fund more than 2.0% in return per year. I believe the fair comparison is actively managed ETFs to an efficient S&P 500 ETF such as iShares’ IVV or Vanguard’s VOO. Once the structure issue is neutralized, then it is a fair comparison. Although actively managed ETFs are one of the two fastest growth areas in the industry, many have short histories as the trend toward well-known managers providing active selection in the ETF structure did not really get going until the last few years. Prior to that, a few “smart stock selection” ETFs “indexized” expert stock selection. This week, we look at two of those ETFs along with two actively managed ETFs that follow quantitative disciplines. The common theme is expert stock selection.
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The ETFs, listed by ticker symbol, include:
GURU – Global X Guru Index ETF
GURU selects firms using a copycat approach, piggybacking on accomplished stock-pickers. The fund’s index looks at published holdings of large hedge funds, focusing on those with concentrated stakes in US-listed securities. Securities selected in this manner are equally weighted. GURU’s free-riding method is intuitive and transparent, but basing a portfolio on lagged quarterly snapshots of nimble hedge funds also comes with difficulties. The index is reconstituted annually and rebalanced quarterly.
GFGF- Guru Favorite Stocks ETF
GFGF invests in US stocks that are favored by prominent long-term investors. The subadvisor selects around 20 investors or gurus with publicly available track records of at least 10 years. From an initial universe of US-listed companies based on the publicly available information and 13F filings, the fund screens out companies with market-cap below $1 billion. Securities are ranked by the number of gurus investing in a particular security, regardless of the size of holdings. The subadvisor will recommend approximately 25-30 stocks based on their determined ranking with consideration to quality or value. A stock’s quality and value is determined by using various financial measurements. GFGF takes a long-term investment view and recommends changes to the portfolio near the beginning and the middle of each year. As an actively managed fund, the portfolio managers can analyze market and financial data to make buy, sell, and hold decisions at their discretion.
JOET – Virtus Terranova U.S. Quality Momentum ETF –
JOET tracks the Terranova U.S. Quality Momentum Index, which aims to combine strong quality fundamentals with positive momentum technical trends. Constituent eligibility begins with the 500 largest US securities by market capitalization, which are then screened and ranked based on a momentum and quality score based on the following factors: (i) return-on-equity, (ii) debt-to-equity, and (iii) sales growth rate. A composite score is then calculated and assigned wherein the top 125 securities with positive momentum form the Underlying Index. Finally, the fund is equally-weighted at every quarterly rebalance and reconstitution. JOET’s underlying index is the brainchild of Joe Terranova, Senior Managing Director and Chief Market Strategist for Virtus Investment Partners. His market expertise and investing principles are utilized in the index methodology.
SYLD – Cambria Shareholder Yield ETF –
SYLD actively selects US stocks that exhibit high shareholder yield which is calculated by considering cash flow measures. Selection starts with the top 20% stocks by combining two popular themes — dividend payments and share buybacks. The fund’s quantitative algorithm then factors in the debt paydowns of the remaining stocks and applies valuation factors. The top 100 stocks that represent the best combination of shareholder yield characteristics and value metrics form the final portfolio. Cambria ETFs are all actively managed under the aegis of Barron’s Investment Roundtable Member, Mebane Faber.
The benchmark indexes and ETFs included here are:
- The S&P 500 Index representing US Large Cap, the ETF is iShares’ IVV.
- The Nasdaq-100, the ETF is Invesco QQQ.
Current ValuEngine reports on these stocks or ETFS can be viewed HERE
| GURU | GFGF | JOET | SYLD | QQQ | IVV | |
| Fund Name | Global X Guru Index ETF | Guru Favorite Stocks ETF | Terranova U.S. Quality Momentum Index | Cambria Shareholder Yield ETF | NASDAQ-100 Index | S&P 500 |
| ValuEngine Rating | 4 | 4 | 3 | 1 | 3 | 3 |
| Forecast 3-mo. Price Return | 1.66% | 3.04% | 1.84% | -0.24% | 3.02% | 2.17% |
| Forecast 1-yr. Price Return | 0.13% | 0.38% | -0.77% | -5.90% | -1.22% | -1.01% |
| Historic 1 mo. Price Return | 2.86% | 5.71% | 2.50% | 5.96% | 10.22% | 4.29% |
| Historic 3 mo. Price Return | 3.16% | 6.63% | 2.55% | 6.30% | 21.13% | 9.44% |
| Historic 6 mo. Price Return | 2.10% | 6.58% | 0.46% | 2.48% | 25.69% | 8.99% |
| Historic 12-month Price Return | -3.69% | 7.91% | 4.16% | 5.57% | 18.40% | 7.10% |
| Historic 3-Yr. Ann. Price Return 3.23% | 3.23% | N/A | N/A | 25.01% | 16.47% | 18.70% |
| Historic 5-Yr Ann. Price Return | 2.07% | N/A | N/A | 11.47% | 14.32% | 8.61% |
| 2022 | -27.94% | -20.32% | -18.04% | -6.12% | -32.58% | -18.17% |
| 2021 | 8.14% | N/A | 26.80% | 48.30% | 27.42% | 28.75% |
| 2020 | 25.23% | N/A | N/A | 13.53% | 48.62% | 18.37% |
| Volatility | 21.51% | 22.89% | 18.74% | 28.03% | 22.30% | 18.89% |
| Sharpe Ratio | 0.1 | -0.5 | 0.15 | 0.25 | 0.64 | 0.46 |
| Beta | 1.07 | 1.08 | 1.02 | 1.24 | 1.1 | 1.00 |
| # of Stocks | 66 | 28 | 126 | 102 | 100 | 500 |
| Undervalued by VE % | 41% | 19% | 26% | 40% | 30% | 35% |
| P/B Ratio | 2.8 | 5.7 | 4.5 | 1.7 | 6.8 | 4.0 |
| P/E Ratio | 20.5 | 23.6 | 17.2 | 6.4 | 29.8 | 20.7 |
| Div. Yield | 0.2% | 0.4% | 1.2% | 2.9% | 0.6% | 1.5% |
| Expense Ratio | 0.65% | 0.65% | 0.29% | 0.59% | 0.20% | 0.03% |
| Assets Under Management (AUM) in Millions | 47 | 31 | 106 | 732 | 187,000 | 310,000 |
| Largest Holding Pct. | NVIDIA (1.94%) | Microsoft Corp (13.79%) | NVIDIA (1.12%) | McKesson Corp (1.83%) | Microsoft Corp (13.20%) | Apple Inc (7.46%) |
| Index Provider | Solactive | None – Active | Wall Street. Indxx, LLC | None – Active | Nasdaq | S&P Global |
| ETF Sponsor | Global X ETFs | Alpha Architect | Virtus Investment Partners | Cambria | Invesco | iShares |
All data as of 6/17/2023 – Best scores in bold; Best expert fund scores in bold italics when index scores are higher. Data from ValuEngine and VettaFI’s ETFdb.com .
Current ValuEngine reports on these stocks or ETFS can be viewed HERE
Observations:
- In line with the opening theory, the active managers were not able to beat the S&)P 500 Index ETF (IVV) in two of the three strong bull markets (2020, 2023- 6 Months). Also, since the financial crisis, almost nothing that is non-leveraged beats QQQ, the Invesco S&P 500 ETF.
- Very surprisingly, SYLD, the Cambria Shareholder Yield ETF actively managed by Meb Faber’s team assisted by a proprietary internal quantitative model, beat both QQQ and IVV by a wide margin in the very bullish year of 2021. That is quite an accomplishment.
- SYLD also trumped everything by a wide margin in the 3-year compounded period thus far. It is also the only true “value” ETF in the group. Its price-to-earnings ratio of 6.7 is by far the lowest; that is also true for its price-to-book ratio of only 1.7. It has the most substantial dividend, 2.9%, which is nearly double that of IVV and quintuple that of QQQ. It also provides active management for the relatively low price of 0.29%, another form of value. Finally, SYLD has the most differentiated top 10 holdings from the other five ETFs which all have portfolio-dominant positions in large-cap tech leaders such as Microsoft (MSFT) and (NVDA), The negative point is that our predictive model gives SYLD its lowest ranking of 1, strong sell.
- GFGF, Alpha Architect’s actively managed and most concentrated ETF, the Favorite Stocks ETF, has done very well relative to its peers in the past 1-month, 6 month and 12- month gains. It also is tied for top ValuEngine predictive model rating 4 (Buy) for year-ahead performance. However, it has high valuations, a relatively short history and the least amount of assets under management.
- In its two-plus years of existence, JOET, reflecting Joe Terranova’s best stock picks, has delivered competitive returns. It lost less in 2022 than IVV and QQQ but gained just a bit less than both in 2021.
- GURU from Global X has the greatest longevity of these ETFs and gets the best combined ratings from ValuEngine’s forward-looking models. Its 4 (Buy) rating from our predictive price appreciation model is complemented by the fact that 41% of its stocks are considered undervalued by the VE valuation model. GURU is expensive for an indexed product. It charges the same fee, 0.65%, as much more nimble and actively managed GFGF for emulating the well-known follow-the-hedge-fund strategy but using the old method of somewhat stale SEC 13F holdings files for execution. More nimble funds may be using products such as Investor Kinetics from DTCC which provides aggregated and anonymized net hedge fund trades with a three-day lag.
- Overall, this analyst concludes that SYLD provides the most compelling case for considering an expert-stock-selection ETF using a defined active management strategy. Moreover, it has compelling metrics that exhibit distinctly different behaviors from the top large cap benchmarks during different market cycles. That said, JOET and GFGF both deliver solid and competitive returns with active stock-picking methodologies. They are certainly worthy of consideration for those who prefer the oversight of active management to robotic indexation.
Comparing Stocks from these ETFs Included in this Analysis
Five stocks were chosen for this analysis.
BROS –Dutch Bros Inc. operates and franchises drive-thru shops. The company offers coffee-based beverages, including custom drinks, cold brews, and freeze blended beverages, as well as Blue Rebel energy drinks. It also provides tea, lemonade, sodas, smoothies, and other beverages through company-operated shops and online channels. Dutch Bros Inc. was founded in 1992 and is headquartered in Grants Pass, Oregon.
FOLD –-Amicus Therapeutics, Inc. is a biotechnology company that focuses on discovering, developing, and delivering medicines for rare diseases. Its commercial product and product candidates include Galafold, an oral precision medicine for the treatment of adults with a confirmed diagnosis of Fabry disease and an amenable galactosidase alpha gene variant based on in vitro assay data. The company also develops AT-GAA, a novel treatment paradigm for Pompe disease; and enzyme replacement therapies for Pompe diseases. It has collaboration and license agreements with Nationwide Children’s Hospital; University of Pennsylvania; and GlaxoSmithKline. The company was incorporated in 2002 and is headquartered in Philadelphia, Pennsylvania.
MCK – McKesson Corp. – McKesson Corporation provides healthcare services in the United States and internationally. It operates through four segments: U.S. Pharmaceutical, Prescription Technology Solutions (RxTS), Medical-Surgical Solutions, and International. The U.S. Pharmaceutical segment distributes branded, generic, specialty, biosimilar and over-the-counter pharmaceutical drugs, and other healthcare-related products. The RxTS segment serves biopharma and life sciences partners and patients to address medication challenges for patients by working across healthcare; connects patients, pharmacies, providers, pharmacy benefit managers, health plans, and biopharma companies to deliver innovative solutions to help people get the medicine needed to live healthier lives; and provides prescription price transparency, benefit insight, dispensing support, third-party logistics, and wholesale distribution support services. McKesson Corporation was founded in 1833 and is headquartered in Irving, Texas.
MSFT – Microsoft Corp.- Microsoft Corporation develops, licenses, and supports software, services, devices, and solutions worldwide. The company operates in three segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing. The company sells its products through OEMs, distributors, and resellers; and directly through digital marketplaces, online stores, and retail stores. Microsoft Corporation was founded in 1975 and is headquartered in Redmond, Washington.
NVDA – NVIDIA Corp.- NVIDIA Corporation provides graphics, and computer and networking solutions in the United States, Taiwan, China, and internationally. The company’s Graphics segment offers GeForce GPUs for gaming and PCs, the GeForce NOW game streaming service and related infrastructure, and solutions for gaming platforms; Quadro/NVIDIA RTX GPUs for enterprise workstation graphics; vGPU software for cloud-based visual and virtual computing; automotive platforms for infotainment systems; and Omniverse software for building 3D designs and virtual worlds. Its Computer & Networking segment provides Data Center platforms and systems for AI, HPC, and accelerated computing; Mellanox networking and interconnect solutions; automotive AI Cockpit, autonomous driving development agreements, and autonomous vehicle solutions; cryptocurrency mining processors; Jetson for robotics and other embedded platforms; and NVIDIA AI Enterprise and other software. NVIDIA Corporation was incorporated in 1993 and is headquartered in Santa Clara, California.
Current ValuEngine reports on these stocks or ETFS can be viewed HERE
| BROS | FOLD | MCK | MSFT | NVDA | IVV | |
| Stock Name | Dutch Bros. | Amicus Theraputic | McKesson Corp | Microsoft | Nvidia Corp. | S&P 500 |
| Market Cap, (Bllns.) | 1.3 | 3.7 | 54.3 | 2588.3 | 1053.5 | 325.8 |
| ValuEngine Rating | 4 | 4 | 3 | 3 | 3 | 3 |
| VE Forecast 3-mo. Price Return | 4.49% | 4.68% | 1.65% | 3.77% | 4.35% | 2.17% |
| VE Forecast 1-yr. Price Return | 1.48% | 4.22% | -1.94% | -1.77% | -4.55% | -1.01% |
| Last mo. Price Return | 6.39% | 15.71% | 2.28% | 12.49% | 47.32% | 4.29% |
| Last 3 mo. Price Return | -5.30% | 13.39% | 19.30% | 31.14% | 76.05% | 9.44% |
| Last 6 mo. Price Return | -6.59% | 7.20% | 8.63% | 39.79% | 151.61% | 8.99% |
| Historic 1-Yr. Price Return | -15.74% | 58.24% | 30.03% | 38.27% | 158.08% | 7.10% |
| Historic 5-Yr Ann. Price Return | -25.42% | -8.12% | 20.26% | 24.01% | 35.84% | 8.61% |
| Volatility | 74.1% | 51.5% | 22.0% | 21.8% | 53.1% | 18.9% |
| Sharpe Ratio | -0.34 | -0.16 | 0.92 | 1.10 | 0.68 | 0.46 |
| Beta | 2.40 | 0.78 | 0.56 | 0.92 | 1.80 | 1.01 |
| Undervaluation Percentile | 9 | 33 | 24 | 17 | 95 | 38 |
| P/B Ratio | 6.0 | 35.8 | 5.0 | 22.2 | 56.8 | 4.0 |
| P/E Ratio | Neg. Earnings | Neg. Earnings | 15.4 | 36.4 | 161.8 | 20.7 |
| P/S Ratio | 1.7 | 10.9 | 0.2 | 12.5 | 40.7 | 16.2 |
| PEG Ratio | 1.0 | 0.4 | 3.6 | 3.1 | 0.9 | 1.9 |
| EPS Growth | 102% | 52.9% | 4.2% | 11.6% | 190.3% | 13.6% |
| Div. Yield | 0.00% | 0.00% | 0.5% | 0.8% | 0.04% | 1.5% |
Current ValuEngine reports on these stocks or ETFS can be viewed HERE
Analysis of Featured Stocks
- Microsoft (MSFT) is the largest of the four stocks and has been the only consistently positive performer. Beyond the corporate description above, the company is a true innovator and the race for supremacy in artificial intelligence has not left the firm behind or twiddling its thumbs. It has been one of the most consistent companies in the industry for decades. As a result, it does not tend to produce growth rates as large as younger companies in the industry because its base is so substantial, the math limits nominal growth. That said, Microsoft stock has gained 38% in the past 12 months as compared with 11% for the computer software industry and the 7% growth by IVV for the same period. Its 5-year annualized price return is 24% as compared with 8.6% by IVV and 3.8%. That 24% annualized growth rate is higher than 97% of the 4,000+ US stocks covered in the ValuEngine Universe. In short, MSFT has been a great long-term holding. It is not, however, a value stock. Its Price/Book. Price/Sales and price relative to Price/Earnings ratios are very high relative to its peers. 83% of stocks covered by ValuEngine are rated as more undervalued by ValuEngine’s proprietary valuation model. So, MSFT is very pricey relative to its peers. From a risk vs. return perspective, that price may be worth paying for in return for its tremendous stability. The stock price volatility is about 1/3 of that of the average stock in its industry group and its solvency ratios are far stronger than most of its peers. The Sharpe Ratio, a measure of how much return investors have realized for one unit of price volatility, is currently at 1.10 which puts it in the 97th percentile. Overall, the ValuEngine predictive model expects MSFT to continue to outperform IVV during the next three months but to underperform during the next 12 months. Overall, the model’s current rating is 3 (Hold).
- NVidia Corp. (NVDA) stock has caught lightning in a bottle. Its 12-monh gain of 158+% lands it in the 99th percentile of our universe. It has been red hot, and most analysts expect that to continue as it is the unquestioned leading equipment provider for artificial intelligence fintech development for the largest companies in the world. It is highly volatile with a beta of 1.8. Although its traditional valuation ratios are very high except for price-to-earnings growth, ValuEngine’s valuation model considers its current price a bargain, rating it more undervalued than 95% of the stocks in our universe. The ValuEngine predictive model rates NVDA 3 (Hold), expecting above-market performance for the next three months as the momentum continues but eventually reverses during the next twelve months.
- McKesson Corp. (MCK) has been a strong and steady stock for the past five years and longer. It has gained 30% the past 12 months and averaged an annualized return of 20% during the past 5 years. The health care company’s annual price volatility is lower than more than 70% of the stocks under coverage. Rated by traditional metrics, it is the least expensive stock in this analysis and compares favorably with S&P 500 benchmark ETF IVV. The ValuEngine valuation model which tends to give more weight to how much future earnings growth potential is being bought at a given price rates it less favorably and considers 75% of the universe less expensive. The 12-month predictive model gives MCK a 3 (Hold) rating.
- Amicus Therapeutic (FOLD) is rated 4 (Buy) by ValuEngine’s predictive model. It is rated higher for 3-month-ahead and 12-month-ahead performance of any of the stocks in this analysis. It is included because it is one of two top-10 holdings in GURU, the Global X Guru Index ETF. This is noteworthy because GURU is the only one of the ETFs analyzed this week that had any holding ranked above 3 (Hold). Amicus is a very volatile small cap growth stock. It has been a strong performer during the past 12 months but has a negative annualized 5-year return. It is not undervalued on either a traditional basis or by our model and it pays no dividend. Timing and growth are currently the most interesting aspects of considering a potential investment in FOLD.
- Dutch Bros. (BROS) is a drive-thru beverage shop franchise that is just beginning to show profitability and a one-month price turnaround after years of losses. Its traditional valuation metrics have been improving but it is highly volatile. Its forecasts are not quite as compelling as the numbers for FOLD during the same period but BROS is also rated a 4 (Buy) for year-ahead performance.
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Summary
Artificial Intelligence and fintech have been the big stories driving the bullish beginning of the 2023 stock market thus far. NVDA and MSFT have been the two most acquired drivers of that growth so it is no surprise that they are among the top holdings in smart-stock-selection ETFs as well as becoming more significant in the benchmark index ETFs, QQQ and IVV. For 12-month price gains, the ValuEngine predictive model gives GURU and GFGF ratings of 4 higher than that of JOET (3, Hold) and SYLD (1, Strong Sell).
Of the five individual stocks we profiled, MSFT and MCK are high quality companies with great stability that have reasonable valuations and are both rated 3 (Hold). The predictive model indicates that NVDA can continue to post gains for another three months before regrouping during the remainder of the 12-month period. In terms of projected 12-month-ahead price gains, FOLD is the highest rated and BROS the second highest of the top featured ETF holdings analyzed in this review. This quality may be most important to traders while long-term investors that already hold MSFT and/or NVDA may wish to stay the course. Those are two stocks that three out of four of our human-expert-stock-selection ETFs and the market-cap-weighted index funds all agree upon. I will wrap this up with a phrase of caution by quoting David Brinkley. On the TV show, “This Week”, he once observed “When we all agree, there is a good chance we are all wrong.”
__________________________________________________________________________
By Herbert Blank
Senior Quantitative Analyst, ValuEngine Inc
www.ValuEngine.com
support@ValuEngine.com
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