The value factor is one of the most widely followed investment factors, but for investors in mutual funds and exchange traded funds, a fund's performance and its fees are major factors in determining just how good of a value investors are getting.
Investors in actively managed value mutual funds pay attention because there is an excellent chance you are getting a bad deal.
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"The average large-cap value mutual fund comes with a 1.1 percent expense ratio. Whether this seems high to you or not might depend on how well these funds have done relative to common benchmarks. We believe, semi-annual research from S&P Dow Jones Indices, operating independently from S&P Capital IQ, continually paints a stark picture that many of these funds may not be worth the cost, said S&P Capital IQ in a research note out Friday.
To go along with those higher fees (1.1 percent per year means $110 for every $10,000 invested), investors are also being subjected to disappointing performance, something that is all too common in the world of actively managed funds.
"Just 30 percent of all large-cap value and 24 percent of all small-cap value funds outperformed the S&P 500 Value and the S&P SmallCap 600 Value indices, respectively, said S&P Capital IQ.
Small-cap value managers are not doing much better than broad small-cap managers, which have failed to beat their benchmarks an average of 80 percent of the time over the trailing five- and 10-year periods, according to S&P Dow Jones Indices.
Large-cap value managers are also better than diversified counterparts, though that is not saying much because the latter group fails to beat its benchmarks about 80 percent of the time over the past five and 10 years.
The failures of active managers with the value factor enhance the utility of ETFs such as the $7.95 billion iShares S&P 500 Value ETF (NYSE:IVE). IVE tracks the S&P 500 Value Index, the benchmark many active managers fail to beat. IVE has returned more than 40 percent over the past three years while charging just 0.18 percent per year.
Over the same period, the iShares S&P Small-Cap 600 Value ETF (NYSE:IJS) has returned north of 42 percent. Though that lags the performance of the broader S&P SmallCap 600 Index, IJS has been a better, more cost-effective better than its actively managed counterparts.
"The average small-cap value fund lagged by an even more egregious 364 basis points in the one-year period, considering the expense ratio is 1.36 percent. For perspective, iShares S&P Small-Cap 600 Value, which has $3.2 billion in assets, incurs a 0.25 percent expense ratio, said S&P Capital IQ.
For the investor that wants to save every dollar possible, a fine idea, Vanguard steps up to the plate with the Vanguard Value ETF (NYSE:VTV). The $18.3 billion VTV, the largest value ETF on the market, charges just 0.09 percent per year, less than 92 percent of rival funds.
VTV is home to nearly 320 stocks, over 38 percent of which hail from either the financial services or health care sectors. Seven of the ETF's top 10 holdings, 25.8 percent of the fund's weight as of July 31, are Dow components.
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