Let's consider WisdomTree Small Cap Earnings (EES). Not only is its price-to-sales a better "deal" than the S&P 500, but EES boasts a trailing 12-month P/E that is 12.3% lower than that of the S&P 500 and 24.7% lower than iShares Russell 2000 Small Cap (IWM). Sales-per-share might not be the only metric, but perhaps we should not ignore it either.
Some might wonder whether there is any evidence to support whether the sales data even matters. This may be difficult to quantify. However, over the last three years, EES has produced 10 percentage points more than its benchmark competitor. Perhaps 1,000 basis points is worthy of additional investigation.
What if we bring the 2007-2009 bear market collapse into play? After all, if a potential investment is a bargain, shouldn't it hold up better than its competitors under extreme pressure? Unfortunately, EES did not show a capacity to "lose less" in the bearish collapse. On the other hand, the outperformance by EES over IWM across seven-and-a-half years jumps to 20 percentage (2,000 basis) points.Let's take a look at another example from the table above, RevenueShares Large Cap (RWL). This ETF trades close to a 10% P/E discount to the S&P 500, in addition to its formidable P/S bargain.
Unfortunately, RWL did not provide inherent downside protection in the 2007-2009 bear. Yet, one can point to longer-term benefits of fundamental value, including a 15 percentage point (150 basis point) spread above the S&P 500 SPDR Trust (SPY) in the period investigated. In sum, if you are less concerned about extreme depreciation over the shorter term, and you're comfortable with holding-n-hoping over the next decade, lower P/S ETFs show an ability to outperform.
On the other hand, if you're like me, you believe in the importance of protection. My clients certainly want me to minimize damage to account values during a bearish downtrend. That's why I use stop-limit orders and trendlines to raise cash levels in unusually dangerous times. Equally important, I employ hedges and non-correlated assets to lessen the impact of sharp selloffs. This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
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