An ETF That's A Good Value For Value Stocks
Low fees have been a primary selling point for exchange-traded funds since the dawn of the industry over two decades ago. Although Vanguard has not been involved in the ETF business for all of those 20-plus years, the company has been able to become the second-largest U.S. ETF issuer due in large part to its low fees.
Knowing that lower fees mean investors keep more of their investment dollars over long holding periods is to say Vanguard ETFs offer some value. Investors can get some of that value while accessing value stocks with the Vanguard Value ETF (NYSE: VTV). VTV charges a scant 0.09 percent per year, or $9 for every $10,000 invested. That makes VTV less expensive than 92 percent of rival ETFs.
VTV And Value
“Value stocks tend to have less-attractive business prospects than their faster-growing counterparts, so they are not necessarily bargains. But they may offer compensation for their risk over the long term. They could also become undervalued if investors extrapolate past growth--or lack thereof--too far into the future,” said Morningstar in a recent note.
Home to 328 stocks with a median market value of $85.5 billion, VTV is not heavy on boring sectors even though its a value ETF. Remember that defensive sectors, such as consumer staples and utilities, are often considered richly valued as investors pay up for reduced volatility. Consumer staples, telecom and utilities stocks combine for just over 21 percent of VTV's weight.
VTV's Allocations And Holdings
Although energy stocks have been drubbed, contracting earnings imply the sector still is not undervalued. As such, energy stocks account for just 9.8 percent of VTV's weight. Financial services is the ETF's sector allocation at 23.3 percent.
“Value stocks have a good long-term record in most markets studied. From December 1978 through January 2016, the Russell 1000 Value Index (which offers similar exposure to this fund) outpaced the Russell 1000 Growth Index by 1 percentage point annualized. But this outperformance has not been consistent. Over the trailing 10 years through January 2016, the Russell 1000 Value Index lagged its growth counterpart by 2.4 percentage points annualized. Yet there is reason to believe that value stocks will offer a modest return edge over the long term,” added Morningstar.
Over the past three years, VTV has returned 29.6 percent compared to 32.1 percent for the S&P 500, but the Vanguard ETF has been slightly less volatile than the benchmark U.S. equity index over that stretch.
VTV's top 10 holdings, which combined for 27.4 percent of the ETF's weight at the end of December, include seven members of the Dow Jones Industrial Average. That group includes Microsoft Corporation (NASDAQ: MSFT) and Exxon Mobil Corporation (NYSE: XOM).
“Low fees have helped the fund outperform its peers and continue to give it an edge. Over the trailing 10 years through December 2015, it outpaced the average surviving fund in the category by 1.2 percentage points annually. Adding to the fund's cost advantage, its benchmark applies a wide buffer zone to limit turnover, which should help mitigate transaction costs,” said Morningstar.
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