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Investing  | January 23, 2019

As top-down, big picture investors, we at Hillswick Asset Management avoid stock-picking, making ETFs a natural fit for our investment style. We are also value investors, preferring to tilt our portfolio towards Value as a factor.

But isn’t value investing all about picking obscure stocks shunned by other investors?  Not necessarily.

In this article, we would like to demonstrate how investors can utilize ETFs to help establish value tilts in their portfolio.

First, let us explain why we believe Value is an attractive factor.  Below is a table of pure factor returns for the U.S. Equity market as of January 8, 2019.  The table shows that the Value factor, while trailing other factors on a 1-year basis, has had the best Long Term return over time. Long Term, in this case, goes back to Jan 1 2000, so we are looking at 19 years of performance. Over this period, Value is by far the best performing pure factor.

But what is Value?

In its simplest form, Value is an investment that is "cheaper" than its Index, meaning it has a lower Price-to-Earnings (P/E) multiple and/or a lower Price-to-Book value ratio (P/B) than the median stock in the index.

Of course, we are unlikely to have a pure Value portfolio, as we also want diversity and all diverse portfolios have exposure to multiple factors. It is our belief though that having more Value than the Index portfolio should allow us to outperform over the long term , if history is any guide.

Here's another view of Value as a factor, also courtesy of Bloomberg.

Note that Value outperformed until about 2014, which was around the time the FAANG boom started in earnest . Could this mean that Value is going to make a comeback if the enthusiasm for FAANG is fading?

We believe that Value will make a comeback at some point, and that it will give us a "tailwind" versus a pure Index portfolio over the long term.

So once an investor decides to add Value to their portfolio, what is the next step?

The ETF market offers many choices when it comes to Value exposure:  there are a myriad of offerings available. At Hillswick, we like to start with Sector ETFs to minimize tracking error to the S&P 500 Index, which is our benchmark.  There are 11 high-level sectors, called GICS sectors, in the S&P 500 Index. They are:

  • Communication Services
  • Consumer Discretionary
  • Consumer Staples
  • Energy
  • Financials
  • Health Care
  • Industrials
  • Information Technology
  • Materials
  • Real Estate
  • Utilities

A basic Sector ETF will contain every issue in the underlying sector weighted according to the Index, so for example, if one were to buy XLF, they would own a basket of stocks consisting of every issue in the S&P 500 Financials Sector weighted according to the index.  That means by definition that the ETF itself will have no factor exposures to the Financials Sector.

The sector will however have factor exposures to the S&P 500 Index as it only represents a portion (roughly 13% as of 12/31/2018) of the entire index.

This is where it gets interesting for someone wanting a diversified portfolio with exposure to the S&P 500 Index in a broad sense but also wants the added tailwind of Value.

What if we could own most of the S&P 500 Index through low-fee Index ETFs and get Value exposure at the same time?

We think this can be achieved by adding more exposure to sectors that score high on Value (low Price/Earnings and Price/Book ratios). A simple process would be to rank sectors on the Value scale and then weigh them according to how attractive they are. So for example right now a portfolio at the start of 2019 with a Value tilt would be overweight Financials, Materials and Energy based on low P/Es and P/B while being underweight Consumer Discretionary, Consumer Staples and Information Technology. To gain even more Value exposure one could look at sub-sectors such as Telecommunication Services, which is now a subsectwor of Communication Services, and Automobiles and Components, a subsector of Consumer Discretionary. It is sometimes easier to add additional exposure to these "cheap" sub sectors by owning individual shares to complement your overall ETF portfolio, as narrow sub sectors may not be available as ETFs.

The portfolio described above would give an investor more exposure to Value relative to the index but would also expose the portfolio  to other risks, such interest rate risk (what happens if rates go up?), making it important to consider overall exposure when one strays from the index (in this case the S&P 500).

We believe combining a Value-driven approach with a top-down Macro outlook provides the best risk-adjusted returns over the long term.


A revolutionary initiative is helping average Americans find quick and lasting stock market success.

275% in one week on XLF - an index fund for the financial sector. Even 583%, in 7 days on XHB… an ETF of homebuilding companies in the S&P 500. 


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