BUSA: New actively managed large-cap value ETF is not worth the cost
![BUSA: New actively managed large-cap value ETF is not worth the cost BUSA: New actively managed large-cap value ETF is not worth the cost](https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1206683052/image_1206683052.jpg?io=getty-c-w1536)
Devenorr
Investment thesis
The Brandes US Value ETF (Bats:BUSA) is an actively managed large-cap value fund with $150 million in assets under management and an expense ratio of 0.60%. An investment committee of Brandes Investment Partners selects stocks based on their estimated intrinsic value, which is derived from metrics such as a company’s price-to-earnings and price-to-book ratios. The strategy is well-known to value investors, but my fundamental analysis shows diversification, quality and sentiment issues that offset BUSA’s value advantage. Therefore, I recommend readers avoid BUSA until it establishes itself.
Overview of BUSA
Strategy discussion
BUSA is led by four industry veterans with a total of 106 years of experience, including 97 years at Brandes. They are:
Brandes Investment Partners
These individuals form the Global Large-Cap Investment Committee. Together they are responsible for selecting the stocks that reduces key personnel risk and increases the chances of consistent strategy implementation. Website of Brandes Investment Partners also points out that the company is independent and owned by its employees and is therefore free from external influences.
BUSA does not track an index. Instead, the managers select stocks based on their price relative to their estimated intrinsic value, which is determined using metrics such as price-to-earnings ratio, price-to-book ratio, price-to-cash flow, debt-to-equity and dividend price. In addition, the website notes that value securities tend to fall out of demand and that the strategy requires patience. In other words, the selection often has weak price momentum, and it is not an ETF where you can expect frequent trades. Although it is early, for the three months ended December 31, 2023, BUSA posted a 1.4% increase, according to its Half-year report.
Performance analysis
Since its inception, BUSA has gained 23.10%, compared to 22.50% for the iShares Russell 1000 Value ETF (IWD), its stated benchmark. As shown below, the SPDR S&P 500 Value ETF (SPYV) and Vanguard Value ETF (VTV) have posted slightly better returns of 25.01% and 24.44%, respectively.
I’m looking for Alpha
There’s not much to lean on, but through the first six months of 2024, BUSA gained 8.02%, ranking 40th out of 108 in the large-cap value category. That’s better than average, but the best performers in this category have been dividend-focused ETFs, and BUSA certainly doesn’t present itself as an income fund. Its pick yields 2.08%, similar to IWD, SPYV, and VTV, but its 0.60% expense ratio means shareholders would only net about 1.48% at current prices.
In addition to the passive ETFs listed above, I will compare BUSA with the Fidelity Enhanced Large Cap Value ETF (FELV). On November 20, 2023, Fidelity revamped its range of actively managed enhanced mutual funds, and in addition to a lower expense ratio of 0.18%, FELV and its predecessor delivered solid returns since May 2007, outperforming IWD by about 27%.
Morning Star
BUSA analysis
Sector exposures and top ten holdings
The table below shows the differences in sector exposure between BUSA, IWD, SPYV, VTV and FELV. BUSA’s prospectus noted potentially high allocations to financials and healthcare, and these sectors make up 49.25% of the portfolio. Industrials and technology are next at 13.45% and 10.94%, respectively, and the ETF has minimal or no exposure to consumer discretionary, consumer staples, materials, real estate and utilities.
The Sunday Investor
The other four ETFs are more balanced, with at least 2.50% allocated to each sector. This should lead to more consistent, but not necessarily better, returns. Evidently, BUSA’s investment committee believes stocks in the financial sector are the most undervalued, and it may be right. On Monday, Steven Cress, head of quantitative strategies at Seeking Alpha, named Wells Fargo Company (WFC) as A Top choice in a possible Trump 2.0 administrationand pointed to the potential for “less stringent capital and liquidity requirements“. Wells Fargo is BUSA’s second largest holding and the diversified banking sub-sector is the most significant, representing 10.26% of the fund.
Brandes Investment Partners
BUSA Basics by Sub-Industry
The table below shows select fundamental metrics for BUSA’s top 25 sub-industries, which make up 81.75% in total. Its five-year beta of 1.01 is above these peers and the category average of 0.96, but is a far cry from what “pure” value ETFs offer. BUSA’s weighted average market cap of $169 billion is also in the same range as these peers, so they are reasonable comparables and suggest that BUSA is attempting to compete directly as a core holding.
The Sunday Investor
Here are three additional observations:
1. BUSA’s growth rates look competitive. Stocks in the healthcare, property and casualty, and aerospace and defense sectors are contributing positively to the fund’s estimated one-year earnings growth rate of 7.63% per share and are helping to offset weakness in the pharmaceuticals and integrated oil and gas sectors. Diversified banks also offer more earnings growth potential than regional banks, a structure that has been beneficial to returns. On a weighted average basis, BUSA’s diversified banks have gained 22.45% year-to-date, compared to 10.08% for regional banks.
FELV also has solid revenue and earnings growth rates, but it is better diversified, with only 61.78% of assets in its top 25 sub-sectors. Diversification is one area where BUSA struggles if its goal is to lure investors away from traditional funds like IWD, SPYV, and VTV. The risk that certain sectors, like financials and healthcare, underperform and managers fail to adapt to changing market conditions, as the fund’s research philosophy and portfolio turnover rate imply, could always exist.
2. Although BUSA’s diversification adds additional risk, the ETF delivers on its promise of holding cheaply valued stocks. BUSA trades at 15.11 times forward earnings using the simple weighted average method and 13.57 times using the harmonic weighted average method. Both of these scores are in the top decile of all large-cap value ETFs I track. However, a lot depends on the structure, as stocks in the financial sector are typically valued cheaply. Using Seeking Alpha’s sector-adjusted factor scores, I came up with a Value Score of 4.21/10, which is only slightly above average. It’s still better than the four peers listed above, which have scores between 3.38/10 and 3.63/10, but from this perspective, BUSA’s value advantage is smaller.
3. BUSA has a sector-adjusted earnings score of 8.35/10, which ranks just 91/109 in the large-cap value category. This score is disappointing because high-quality stocks tend to perform better over the long term. In addition, I worry that the Investment Committee is swimming too much against the grain, as evidenced by its weak EPS revision score of 5.77/10. This score, which measures changes in consensus earnings estimates, indicates poor analyst sentiment, which can be a significant headwind even when the underlying companies are strong.
Investment recommendation
BUSA does not offer a good enough mix of diversification, growth, value, quality and sentiment, in my opinion, to justify its 0.60% expense ratio. I expect the ETF to overweight financials for the foreseeable future, which could pay off in a Trump 2.0 administration. However, I also do not expect the Investment Committee to react quickly when market conditions change, which is the main benefit of an active strategy. Of course, it is too early to say for sure, but readers are wise to reserve judgment today until we have more information. Until then, FELV is a better diversified choice with at least as attractive a factor mix and a much lower expense ratio, and I prefer it over BUSA.