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 (2000 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 (1500 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 sell-offs.