Why It’s Time to Revisit Low-Cost Value ETFs
This article was originally published on ETFTrends.com.
Value stocks and related value ETFs have recently shown some signs of life, indicating it could be time to revisit funds such as the Vanguard Value ETF (VTV) .
Value stocks usually trade at lower prices relative to fundamental measures of value, like earnings and the book value of assets. On the other hand, growth-oriented stocks tend to run at higher valuations since investors expect the rapid growth in those company measures, but more are growing wary of high valuations.
VTV, one of the largest value ETFs in the U.S., follows the CRSP US Large Cap Value Index. The fund charges just 0.05% per year, or $5 on a $10,000 investment, making it cheaper than 95% of competing funds, according to Vanguard data.
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VTV's “weighting approach tilts the portfolio toward the largest value stocks, giving the fund a larger-cap orientation than most of its peers,” said Morningstar in a recent note. “The biggest stocks are not necessarily the cheapest. Market-cap weighting can even reduce the fund’s exposure to stocks as they become cheaper, as this typically accompanies a decline in market cap.”
Finding Value With Value Factor
The value style, though, has came into focus after a bout of heightened market volatility and lingering global uncertainty pushed investors to reconsider riskier high-growth stocks. The Vanguard Value ETF holds 336 stocks with median market value of $94.5 billion. VTV's price-to-earnings ratio of 17.1 is below that of the S&P 500.
“Large-cap stocks seldom trade at low valuations without good reason. The low valuations of the fund’s holdings tend to reflect lower expected growth, profitability, or higher risk (business or financial) than their pricier counterparts,” according to Morningstar. “Directionally, the market gets valuations right, so the fund’s holdings aren’t necessarily bargains. 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.”
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Currently, many domestic value ETFs are heavily allocated to the financial services and/or energy sectors. VTV reflects that theme, allocating over a quarter of its weight to financial stocks. The ETF's second-largest sector weight is technology at 14.50%.
VTV has a Morningstar rating of Silver. The Vanguard fund is down about 1% this year.
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