EES vs. IJS: Earnings Strategy Matches Value in Small Business Comparison (NYSEARCA:EES)

(This article was co-produced with Hoya Capital Real Estate)

introduction

There is a growing variety of ETFs that cover the small-cap sector both in the US, international markets for developed and/or emerging markets, or those that cover the entire spectrum. Besides the The usual for growth vs. value sub-parts, I’ve reviewed other ones recently which I’ve given links at the end of this article. Here I compare a common value ETF against one focused on dividends, namely:

• iShares S&P Small-Cap 600 Value ETFs (New York: IJS)
• WisdomTree US SmallCap Fund (NYSEARCA: EES)

Historical returns for small cap stocks

While that hasn’t been the case for most of the past decade thanks to tech stocks, longer history shows that smaller is better.

Small cap value has the best CAGR, and despite having the second highest in terms of StdDev benchmark growth rate, SCV stock still has the best Sharpe and the Sortino lineage.

iShares S&P Small-Cap 600 Value ETF Review

Seeking Alpha describes this ETF as follows:

The iShares S&P Small-Cap 600 Value ETF managed by BlackRock Fund Advisors. The investment seeks to track the results of the investment in S&P SmallCap 600 Value Index, consisting of small-cap US stocks showing value characteristics. IJS started in the year 2000.

Source: callingalpha.com IJS

IJS has $6.6 billion in assets under management and has a TTM yield of 1.52%. The graphics are 18bps.

Index review

S&P describes the index as follows:

We measure stock value using three factors: book value, earnings, and sales-to-price ratios. S&P Style Indices breaks down the entire market capitalization of each major index into growth and value indices. Components are selected from S&P SmallCap 600®.

Source: spglobal.com index

They also provided some basic data about the index.

An important note about the S&P Value/Growth Indexes is that the same stocks can be held at weights determined by company-wide value/growth factors. They provide this chart to show this spectrum.

This yields 188 stocks in both the S&P 600 Value and Growth Indexes.

IJS Holdings Review

I’ll start with the wallet features that iShares provides.

Next, I looked at the sector, which will be compared with EES later.

Among the top four sectors, Morningstar classifies all sectors except Industries as cyclical; Hopefully, the FOMC will not push the US into recession after that.

top collectibles

Aside from the major holdings, cash, the following 20 stocks account for 14% of the portfolio of just under 500 shares. The bottom half of the portfolio comes in at 19%, which is about average from what you saw in that part of the ETF allocation. Unlike some large-cap ETFs, an ETF does not rely on a single sector or a few positions to drive its results.

IJS Distribution Review

Throw out the outliers, and IJS has shown very little improvement in what it sends to investors. iShares shows that even the very large payouts came from income, not from any capital gains or ROC, the latter extremely rare for an ETF. The most likely source is companies that paid extra dividends at the end of the year. Since there is no boost, the yield score is as low as “D+”.

SmallCap’s American WisdomTree Fund Review

Seeking Alpha describes this ETF as follows:

Investing seeks to track price and return performance, before fees and expenses, from SmallCap US WisdomTree Index. Under normal circumstances, at least 95% of the Fund’s total assets (excluding collateral held from securities lending) will be invested in index component securities and investments that have economic characteristics substantially identical to the economic characteristics of these component securities. The index is a weighted index primarily made up of the dividend-producing companies within the small-cap sector of the US stock market. EES started in 2007.

Source: callingalpha.com EES

EES is much smaller than IJS at $553 million in AUM. The forward yield is 1.09% and the fee is 38 bps, giving the IJS ETF a 20 bps cost advantage.

Index review

WisdomTree describes their index as follows:

The WisdomTree US SmallCap Index is a basically weighted index that measures the performance of dividend-producing companies within the small cap sector of the US stock market. The index is composed of companies in the bottom 25% of the market capitalization of the WisdomTree US Total Market Index after removing the top 500 companies. Companies must be incorporated and listed in the United States and have generated positive cumulative earnings over the last four fiscal quarters prior to the index measurement date. The index is weighted for December earnings to reflect the relative share of total profits made by each constituent company. Companies that make more profits generally have greater weights in the index.

Source: wisdomtree.com/investments/index

EES Holdings Review

Sectoral allocation shows that Eastern Equatoria is more concentrated in its largest sectoral allocations, most of which also top IJS allocations, only at higher levels.

top collectibles

Despite having an additional 400 positions, the top 20 allotment is just below IJS: 13%. Here, the bottom half allocation is 20%, again close to what IJS has. While about 70% of the allocation is in four segments, only two stocks have a weight of +1%.

EES Distribution Review

Like IJS, EES shows little growth in payments. Also, like IJS, they skip paying, which hurts the grade they got by looking for alpha; Here being “D+”.

Compare ETFs

Using Fidelity as well as some Alpha research, we see that they prefer EES over IJS: green cells are the preferred value.

It is very unusual for the ETF to show itself better in value and growth data points when compared. For value/growth stock assignments, Vanguard offers the following.

The big allocation difference is in the percentage listed as growth stocks, EES has twice the weight of IJS, but it all comes from the Blend allocation.

ETFs have the following sector overlap and differences.

EES holders also own 70% of the shares owned by IJS. IJS’ biggest allocation difference over EES is in Real Este shares; EES in Finance.

Since some investors measure each ETF against SPDR S&P 500 ETFs (Spy), I included it here.

As others have commented, time is important. So, while SPY is the best since 2007, the post-COVID year shows a different outcome.

Both time periods show closure of the IJS and EES, with a correlation factor of 98%. It seems to be a matter of which manager the investor prefers and their opinion of the future on real estate and financial stocks, the big sector differences that both ETFs currently offer investors as well.

Portfolio strategy

One important question to ask after deciding which small cap allocation is desirable is “value,” as reviewed here, or growth stocks. So, I added a file iShares S&P Small-Cap 600 Growth ETF (IJT).

The data shows that investors did better holding IJT than any of these ETFs. This is not to say that there isn’t a value ETF that might be better, as the actively managed AVUV ETF has shown.

When looking at the return and risk data, it shows volatility between these two value-focused ETFs. A search for the Alpha rating system turns up better options, too.

Related links

Below are links to my other recent articles covering small cap funds.

For those desiring international exposure, read AVDV Vs. SCZ: The new ETF is proven so far.