Growth Or Value? Which Way To Lean?

Value and small-cap ETFs give investors a chance to test the Fama-French theory. Blind adherence to the theory might not be producing the best results.

Maybe you have to be of a certain age to know how to get the “TILT” fault to appear on an old-fashioned pinball machine. You can, however, tilt your portfolio no matter how old you are.

By tilt, I mean overweighting an investment style within a total portfolio. You can, for example, tilt toward small-cap stocks or value stocks simply by allocating portfolio space to any exchange traded funds (ETFs) focused on those styles. Long before smart beta became fashionable, style ETFs offered investors and advisors opportunities to earn higher risk-adjusted returns than the market with relatively modest incremental costs.

But which of these style funds is best for your portfolio?

Seminal research by Eugene Fama and Kenneth French form the basis for many advisors’ recommendations to tilt a portfolio toward small-cap or value stocks. However, the advent of style ETFs revealed that blind adherence to this dictum might not produce optimum results.

Rubber Meets the Road

The granddaddies of style ETFs are in the iShares line, which debuted in 2000, and include value and growth tilts on the S&P 500, the S&P Mid-Cap 400 and the S&P Small-Cap 600 indices. If we measure each of these nine ETFs by alpha over several discrete time frames, we actually find the most positive results were produced by the mid-cap value fund, not the small-cap value portfolio.

Overall, when clocked against the Vanguard Total Stock Market ETF (NYSE Arca: VTI), the iShares complex produced positive alpha in just 37 percent of instances over one-, three-, five-, 10- and 15-year time periods. Topmost was the iShares S&P Mid-Cap 400 Value ETF (NYSE Arca: IJJ), cranking out positive alpha in four (80 percent) of five-time frames, most importantly in the 15-year span. Three funds – the iShares Core S&P 500 ETF (NYSE Arca: IVV), the iShares S&P 500 Value ETF (NYSE Arca: IVE) and the iShares S&P Small-Cap 600 Value ETF (NYSE Arca: IJS) – put a plus sign in front of their alpha readings in three (60 percent) of five cycles.

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DisclosureBrad Zigler pens Wealthmanagement.com's Alternative Insights newsletter. Formerly, he headed up marketing and research for the Pacific Exchange's (now NYSE Arca) ...

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