A Good ETF's Underperformance Is a Feature, Not a Bug
Summary
- The commentary is set in early 2026, looking back at a hypothetical 2025 where Warren Buffett retired and value strategies struggled.
- The speaker highlights a massive valuation dispersion: The S&P 500 ended 2025 with a P/E of ~27.6x, while the Midcap Value category traded at ~17.9x and the Cambria Shareholder Yield strategy at ~12.5x.
- A core behavioral finance argument is made: "Winners lose much of the time." The speaker uses Berkshire Hathaway's 1999 underperformance (lagging S&P by 40%) as a parallel to current value strategy drawdowns.
- The central thesis is that recent underperformance in shareholder yield strategies (2024-2025) combined with deep valuation discounts presents a high-conviction buying opportunity, similar to buying Berkshire in 2000.
Trade Ideas
"S&P [P/E was] a whopping 27.61... Valuation metrics offer little insight into potential short-term market movements, they have historically exhibited explanatory power over extended horizons." The speaker uses the S&P 500's high valuation as a cautionary benchmark. A P/E of 27.6x implies future returns are "constrained by starting prices." The logic suggests that capital should be reallocated from the expensive broad index into cheaper pockets of the market (Value/Shareholder Yield). Avoid or underweight broad large-cap indices due to compressed equity risk premiums and high multiples. Momentum in large-cap growth/tech could continue to defy valuation gravity in the short term (irrational exuberance).
"SYLD... has struggled recently, placing it in the bottom 11% versus its category in 2025... P/E for SYLD was 12.52... S&P a whopping 27.61." The fund has underperformed for two consecutive years (2024-2025), creating negative sentiment and outflows. However, the underlying holdings are trading at less than half the valuation of the broad market (12.5x vs 27.6x). Historically, buying quality strategies during periods of peak pessimism and low valuation leads to significant mean reversion and outperformance. Long positions are warranted to capture the valuation gap as the "rough patch" normalizes. The "value trap" dynamic could persist longer than expected; the strategy is actively managed and may deviate significantly from benchmarks.
Meb Faber
Co-founder and Chief Investment Officer at Cambria Investment Management
"For the category, which is Morningstar Midcap Value, [the P/E was] 17.86." While the speaker is pitching a specific active fund (SYLD), he explicitly benchmarks it against the Midcap Value category. He notes this entire category is trading at a massive discount to the S&P 500 (17.86x vs 27.61x). Investors who prefer passive exposure over active management can still capture this thematic "value spread" by buying the index tracking the Midcap Value sector. Long Midcap Value as a sector rotation play away from expensive large caps. Economic recession could hurt mid-cap companies more than diversified large caps.
