BUSA Underperforms Compared to Low-Cost Index Funds Despite Attractive Forward PE Ratio” thoroughly evaluates the newly launched BUSA ETF, an actively managed large-cap value fund guided by the principles of value investing espoused by Benjamin Graham and David Dodd. Despite boasting an attractive forward price-earnings ratio, BUSA lags behind its competitors like IWD, SPYV, and VTV in sector-adjusted value metrics. With $150 million in assets and a 0.60% expense ratio, the ETF has moderate gains since its October 2023 inception but sacrifices diversification, quality, and sentiment—factors that render it less appealing. Heavily weighted towards Financials and Health Care, BUSA also exhibits diversification risks. As of now, it is prudent to await more performance data before committing to this ETF, while alternative options like FELV present stronger diversification and lower costs. Have you ever wondered why some investment vehicles, despite their seemingly promising fundamentals, fail to outperform simpler, low-cost alternatives? This is precisely the question facing the newly launched BUSA ETF, an actively managed large-cap value fund that has not lived up to its initial promise despite its appealing forward PE ratio.
Introduction: The Promise and Reality of BUSA
BUSA has gained attention since its launch in October 2023 due to its attractive valuation metrics, disciplined value-investing approach, and seasoned management team. The fund, with $150 million in assets and an expense ratio of 0.60%, selects stocks based on intrinsic value metrics established by renowned investors Benjamin Graham and David Dodd. Despite its compelling narrative and the theoretical promise of superior returns, BUSA’s performance has been underwhelming when compared to low-cost index funds like IWD, SPYV, and VTV.
The Principles Behind BUSA
BUSA’s investment strategy is deeply rooted in the principles of value investing, a time-tested approach focusing on stocks that the market undervalues. The fund prioritizes intrinsic value metrics, including price-earnings (P/E) and price-book (P/B) ratios. These metrics gauge whether a stock is trading at a fair price compared to its fundamentals, such as earnings and book value.
Value Investing: The Core Philosophy
Value investing aims to identify stocks that trade for less than their intrinsic value, providing a margin of safety and the potential for significant upside. This philosophy, pioneered by Graham and Dodd, relies on rigorous financial analysis and a long-term investment horizon. BUSA’s stock selection process mirrors this philosophy, aiming to uncover undervalued large-cap companies with the potential for appreciation.
BUSA’s Strategy in Practice
Managed by four industry veterans at Brandes Investment Partners, BUSA employs a low turnover strategy, with only a 1% turnover rate in its initial months. This reflects a commitment to long-term investment rather than frequent trading based on short-term market movements. However, despite these noble ideals and experienced management, BUSA has struggled to deliver the promised returns.
Comparing BUSA to Low-Cost Index Funds
The Performance Gap
Since its inception, BUSA has shown moderate gains. However, it significantly underperforms when compared to low-cost index ETFs like IWD, SPYV, and VTV.
| Fund | Expense Ratio | 1-Month Return | 6-Month Return | 1-Year Return |
|---|---|---|---|---|
| BUSA | 0.60% | 1.5% | 5.0% | N/A |
| IWD | 0.19% | 2.2% | 6.5% | 10.0% |
| SPYV | 0.15% | 2.0% | 7.0% | 11.5% |
| VTV | 0.04% | 2.3% | 6.8% | 10.8% |
The above table illustrates how BUSA’s returns lag behind those of its low-cost counterparts. The expense ratios of these index funds are also significantly lower, contributing to their higher net returns.
Sector-Adjusted Value Features
One of BUSA’s notable weaknesses lies in its sector-adjusted value metrics. Despite holding stocks with low valuation ratios, BUSA struggles with sector-adjusted value and profit scores. This inefficiency hampers its performance, making it less appealing compared to more diversified, lower-cost funds.
Diversification and Sector Risks
Concentrated Sector Exposure
BUSA holds a heavy weighting in the Financials and Health Care sectors. While these sectors often contain undervalued gems, this concentration exposes the fund to significant sector-specific risks. A downturn in either sector could have outsized negative impacts on BUSA’s overall performance.
| Sector | BUSA Weighting | SPYV Weighting | VTV Weighting |
|---|---|---|---|
| Financials | 25% | 18% | 20% |
| Health Care | 30% | 15% | 13% |
| Technology | 10% | 22% | 25% |
| Others | 35% | 45% | 42% |
Diversification: Quality and Sentiment
BUSA’s strategy sacrifices diversification, quality, and sentiment scores, affecting its performance and appeal. Diversified funds, on the other hand, spread their investments across a broader range of sectors and companies, reducing the impact of sector-specific downturns.
Long-Term Prospects
Launched in October 2023, BUSA’s long-term performance remains uncertain. Its current composition and performance metrics do not justify immediate ownership, especially when compared to better-performing and less costly alternatives.
Recommendations for Investors
Waiting for More Data
Given BUSA’s recent launch and uncertain long-term performance, it is prudent for investors to wait for more performance data before making a decision. This will provide a clearer picture of the fund’s capabilities and its potential trajectory.
Exploring Alternative ETFs
Investors looking for large-cap value exposure might consider alternative ETFs like FELV, which offer better diversification and lower expense ratios.
| Fund | Expense Ratio | Diversification | Quality Score | Sentiment Score |
|---|---|---|---|---|
| BUSA | 0.60% | Low | Low | Moderate |
| FELV | 0.25% | High | High | High |
| IWD | 0.19% | Moderate | High | High |
| SPYV | 0.15% | Moderate | High | High |
These funds provide a more balanced approach, reducing the risks associated with sector concentration and potentially offering more stable returns.
Conclusion
BUSA, despite its attractive forward PE ratio and adherence to value investing principles, has underperformed compared to low-cost index funds. Its heavy weighting in specific sectors and lack of diversification, combined with a higher expense ratio, contribute to its underperformance.
Investors are advised to wait for more data to assess BUSA’s long-term viability. In the meantime, more established and diversified ETFs like FELV, IWD, SPYV, and VTV offer compelling alternatives that combine lower costs with better performance metrics. The investment landscape is ever-evolving, and prudence combined with thorough analysis will always remain the cornerstone of successful investing.
