Market Overview

A Vanguard ETF Delivering Value On The Cheap


There are dozens of large-cap value exchange-traded funds for value investors to consider. One of the most venerable is the Vanguard Value ETF (NYSE: VTV).

VTV, which tracks the CRSP US Large Cap Value Index, is beloved among value investors for several reasons, not the least of which is its low fee. The Vanguard fund charges just 0.05 percent per year, the equivalent of $5 on a $10,000 investment. That makes VTV less expensive than 95 percent of competing value strategies, according to issuer data.

What Happened

On a historical basis, value stocks often outperform their growth and momentum counterparts with less volatility over long holdings periods. However, during the course of the current bull market in U.S. stocks, the value factor is lagging growth and momentum.

Over the past three years, VTV is trailing its growth counterpart, the Vanguard Growth ETF (NYSE: VUG), by nearly 1,000 basis points. During the same period, VTV has delivered barely more than half the returns of the growth-oriented Nasdaq-100 Index.

Why It's Important

“Large-value stocks tend to be mature businesses that are often trading at low valuations for good reason, including slow expected growth and, in some cases, high business risk,” said Morningstar in a note on VTV last Friday.

VTV's 336 holdings “likely offer lower return potential than smaller-value stocks, but they also tend to be less risky,” according to the research firm.

The ETF's holdings have a median market value of $94.5 billion and the fund lives up to its value billing with a price-to-earnings ratio that implies discounts to the S&P 500 and other diversified large-cap equity benchmarks.

VTV is typical of many domestic large-cap value strategies in that it features significant exposure to the financial services stocks (over 25 percent of the ETF's weight). Technology is VTV's second-largest sector allocation at 14.50 percent.

What's Next

If investors continue prizing growth over value or discount the earnings prospects of value stocks too much, the value factor could become more attractive.

“Directionally, the market gets valuations right, so the fund’s holdings aren’t necessarily bargains,” said Morningstar. “But they could become undervalued, if investors extrapolate past growth--or lack thereof--too far into the future. That said, large-cap stocks are less likely to be mispriced than small-cap stocks, as they are more widely followed.”

Morningstar has a Silver rating on VTV.

Related Links:

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