Value investing, a strategy embraced by prominent investors like Warren Buffett, has historically delivered strong returns over the long haul. However, in recent times, value stocks have lagged behind growth stocks significantly, largely due to low interest rates boosting the valuations of high-growth companies. According to Morningstar data spanning from 2011 to 2020, large value funds consistently underperformed large growth funds by over 5 percentage points annually. In 2020 particularly, this performance gap widened to a staggering 32.2 percent.
Yet, as the Federal Reserve responds to mounting inflationary pressures by hiking interest rates, some market participants anticipate a potential resurgence in value stocks.
Indeed, in 2022, the Russell 1000 Value Index experienced a decline of approximately 7.5 percent, contrasting sharply with the more than 29 percent drop witnessed by the Russell 1000 Growth Index. However, this trend flipped in 2023, as the value index rebounded with an approximately 11.5 percent increase, while the growth index surged by roughly 42.7 percent.
What is value investing?
Value investing encompasses various interpretations, but at its core, it entails acquiring assets at a price lower than their intrinsic value. Growth is undoubtedly integral to a company’s value proposition to investors, and firms experiencing robust growth can indeed offer compelling value propositions, contingent upon their acquisition cost.
In professional investment circles, the fund landscape is often delineated into distinct categories like value and growth funds. This classification necessitates a more quantitative delineation of value and growth. Value funds typically feature companies with lower price-to-book and price-to-earnings ratios compared to broader market indices. They also tend to offer higher dividend yields but anticipate lower future earnings growth.
Top value ETFs
Vanguard Value ETF (VTV)
The Vanguard Value ETF aims to mirror the CRSP U.S. Large Cap Value Index, gauging the performance of large-cap value stocks, with approximately 350 diverse holdings.
Key Metrics:
- 5-year returns (annualized): 11.6 percent
- Expense ratio: 0.04 percent
- Assets under management: $117.5 billion
- Top holdings: Berkshire Hathaway (BRK.B), UnitedHealth Group (UNH), Johnson & Johnson (JNJ), and JPMorgan Chase (JPM)
- Dividend yield: 2.5 percent
iShares Russell 1000 Value ETF (IWD)
IWD aims to replicate the performance of the Russell 1000 Value Index, comprising large- and mid-cap U.S. stocks with value attributes, offering investors access to potentially undervalued companies compared to peers.
Key Metrics:
- 5-year returns (annualized): 10.0 percent
- Expense ratio: 0.19 percent
- Assets under management: $56.3 billion
- Top holdings: Berkshire Hathaway (BRK.B), Johnson & Johnson (JNJ), Exxon Mobil (XOM), and JPMorgan Chase (JPM)
- Dividend yield: 2.0 percent
Vanguard Small-Cap Value ETF (VBR)
The Vanguard Small-Cap Value ETF aims to mirror the performance of the CRSP U.S. Small Cap Value Index, reflecting the returns of small-cap value stocks. The fund boasts a portfolio of over 800 stocks, with the top 10 holdings comprising 6 percent of its assets.
Key Metrics:
- 5-year returns (annualized): 10.3 percent
- Expense ratio: 0.07 percent
- Assets under management: $28.8 billion
- Top holdings: Builders FirstSource (BLDR), IDEX (IEX), Booz Allen Hamilton (BAH), and Atmos Energy (ATO)
- Dividend yield: 2.1 percent
Vanguard Mid-Cap Value ETF (VOE)
VOE aims to replicate the performance of the CRSP U.S. Mid Cap Value Index, which tracks the returns of mid-cap value stocks. Positioned between small- and large-cap stocks, the fund encompasses approximately 200 stocks, with the top 10 holdings constituting 12 percent of its assets.
Key Metrics:
- 5-year returns (annualized): 10.1 percent
- Expense ratio: 0.07 percent
- Assets under management: $16.6 billion
- Top holdings: Arthur J. Gallagher & Co (AJG), Carrier Global (CARR), PACCAR (PCAR), and Newmont Corp. (NEM)
- Dividend yield: 2.2 percent
Fidelity High Dividend ETF (FDVV)
The Fidelity High Dividend ETF focuses on investing in stocks of large- and mid-cap companies anticipated to sustain and enhance dividend payments over time. With approximately 100 stocks in its portfolio, the fund allocates 29 percent of its assets to its top 10 holdings.
Key Metrics:
- 5-year returns (annualized): 13.6 percent
- Expense ratio: 0.15 percent
- Assets under management: $2.7 billion
- Top holdings: Apple (AAPL), Microsoft (MSFT), Nvidia (NVDA), and Exxon Mobil (XOM)
- Dividend yield: 3.3 percent
SPDR Russell 1000 Yield Focus ETF (ONEY)
ONEY aims to mirror the performance of the Russell 1000 Yield Focused Factor Index, striving to capture higher-than-average dividend yields to enhance overall returns.
Key Metrics:
- 5-year returns (annualized): 12.8 percent
- Expense ratio: 0.20 percent
- Assets under management: $812.8 million
- Top holdings: Diamondback Energy (FANG), Valero Energy (VLO), Dow Inc. (DOW), and Devon Energy (DVN)
- Dividend yield: 3.1 percent
In Conclusion
Investing in value ETFs provides investors with a convenient avenue to access stocks believed to be undervalued by the market. Through an ETF, investors can hold a diversified portfolio of such stocks, bypassing the need for extensive research typically associated with individual stock selection. Additionally, they benefit from diversification across various industries, as these stocks typically trade at below-average earnings and asset multiples.