Value Investing – Why We’re Focused on ETFs

Given a rebounding economy, higher inflation, and the likelihood of three or more rate hikes, value investing is where I want to be. Indices last week ended in the red amid growing political tensions. However, solid earnings and a strong labor market continue to buoy markets amidst the ebbing tide. U.S. consumers are starting to feel the sting of inflation on their wallets. Inflation is hitting highs not seen since the early 80s. U Michigan’s Consumer Sentiment reading for February stood at 61.7, declining from 67.2 in January.

Large-cap value stocks are outperforming more expensive growth stocks by one of their widest margins since 2001. It is possible that the discount rate provides a possible explanation as to why growth stocks are falling out of favor and value stocks are gaining steam. Valuations of profitable companies remain high when they are expected to maintain their earnings growth rate. Future earnings are worth more today when the discount rate is lower, but worth less today, as the discount rate rises. In other words, future earnings become less attractive in a rising rate environment.

The U.S ETF industry added over $24 billion in assets last week. Inflows into ETFs have totaled $82 billion year-to-date. Risk-off strategies have seen massive inflows. Vanguard’s Value ETF (“VTV”) added $4.7 billion and Schwab’s U.S. Dividend Equity ETF (“SCHD”) added $1. 8 billion.

It is my belief that value investing offers more promise given the rebounding economy and chance of multiple Fed interest rate hikes. Value stocks offer investors the chance to earn higher returns with less volatility. The stocks I look for will offer larger dividend payouts than their growth peers, as well.

Why do I recommend ETFs over individual securities for the retail investor? Investors are attracted to value stocks for their ability to generate outsized market returns. However, identifying stocks that are mispriced (i.e. stocks whose intrinsic or extrinsic value is worth more than the market currently has them priced at) is innately hard to do. The efficient market hypothesis states that all information is currently accounted for in current stock prices; markets tend to be efficient. Buying an ETF provides more security compared to buying an individual stock by virtue of offering investors diversification. Value ETF investing also provides investors with access to buying stocks in companies in cyclical industries.  

One thing to consider when doing your due diligence, however, is that not all value-focused ETFs hold the same things. Some of these ETFs hold larger concentrations of value-oriented technology stocks. Ironically, these tech stocks may be the same stocks that investors may actually be attempting to reduce exposure to. IVE holds stakes in Visa and Mastercard, for example, thereby increasing its exposure to IT relative to an ETF like the iShares Russell 1000 Value ETF(“IWD”).

Let’s look at some of the best value stocks for ETF investors.

Best Value ETFs

First, there’s the Vanguard Value ETF (“VTV”). This option offers excellent diversification and will give you access to undervalued large-cap companies. VTV is one of the largest ETFs in terms of assets under management and it closely tracks the CRSP Large Value Index. The ETF invests in more than 300 stocks and Vanguard is notorious for keeping transaction fees low, while maintaining low turnover. VTV has an expense ratio of 0.04%.

VTV provides excellent diversification, and the ten largest holdings comprise ~20% of the value of the fund, while the next 10 companies account for ~13% of the ETF’s value. VTV also provides a dividend yield well above 2%, which is attractive when compared to the ultra-low expense ratio.

Vanguard also offers a mid-cap and a small-cap value ETF. The Vanguard Mid-Cap Value ETF (“VOE”) and the Vanguard Small-Cap Value ETF (“VBR”) are excellent choices. Both ETFs focus on companies that have high book values, strong historic and projected earnings, high dividends, and stable revenue. You will, however, note that VOE has much higher turnover; as high as 40% annually, as the fund’s managing criteria more narrowly govern investments. VBR tracks the CRSP U.S. Small-Cap Value Index, which is comprised of more than 900 companies with a valuation range of $30 million to $16 billion.

Both ETFs maintain a low expense ratio of just 0.07%.

Here are some of the other top-rated value ETFs that you can consider:
1. iShares S&P 500 Value ETF (“IVE”)
2. Vanguard Mega Cap Value ETF (“MGV”)
3. Schwab U.S. Large-Cap Value ETF (“SCHV”)
4. Invesco S&P 500 Enhanced Value ETF (“SVPU”)
5. Vanguard S&P 500 Value ETF (“VOOV”)
6. SPDR Portfolio S&P 500 Value ETF (“SPYV”)

International Large-Cap Value ETFs
1. Blackrock iShares MSCI Intl Value Factor ETF (“IVLU”)

Emerging Market Value ETFs
1. VictoryShares USAA MSCI Emerging Markets Value Momentum ETF (“UEVM”)