CGDV - IUSV: Value's Return Is Coming

2023-10-02 11:29:26 ET

Summary

• Value investing has struggled in the past decade, but there is potential for a comeback.
• The iShares Core S&P U.S. Value ETF is a low-cost option for investors seeking exposure to undervalued U.S. stocks.
• IUSV's composition, performance, and risk profile make it a competitive choice compared to other value ETFs.

Price is what you pay; value is what you get. - Ben Graham

Value is dead - long live value.

The last decade-plus has not been kind to value investors relative to Technology, and as a result the growth style. It looked like value was about to make a sustained comeback, but the regional bank crisis put that dynamic in reverse this year. On a relative basis, I believe value can start to lead again (just by being down less if anything) which means if you want to be in equities, tilting there might make sense here.

There are a number of value ETFs out there, but let's focus here on the iShares Core S&P U.S. Value ETF (IUSV). IUSV is an exchange-traded fund launched by BlackRock, one of the world's leading asset management firms. IUSV is designed to track the investment results of an index composed of large- and mid-capitalization U.S. equities that exhibit value characteristics.

The fund's primary objective is to provide investors with low-cost exposure to a broad range of U.S. value stocks, which are thought to be undervalued by the market relative to comparable companies. This characteristic of value stocks is what makes IUSV an attractive investment vehicle for long-term investors seeking growth.

Fund Composition and Top Holdings

Understanding the composition of IUSV provides a clearer picture of its investment strategy. IUSV's portfolio is made up of a diversified mix of sectors, with the heaviest allocation in the Financials sector, followed by Information Technology, and Industrials.

The top holdings of IUSV include companies like Microsoft, Meta Platforms Class A, Berkshire Hathaway. The top 10 holdings account for approximately 24% of the total assets under management. Note this is less than most growth indices in general, making this less susceptible to idiosyncratic risk.

IUSV's Performance and Risk Profile

When we compare IUSV against the Russell 1000 Growth ETF ( IWF ), it's clear that growth-style investing has been the winner for over a decade despite momentary rotations in 2021 and 2022. In 2023, the fund has lagged meaningfully, and yes the downtrend remains intact. Having said that, I do think this certainly has a chance to perform better in the years ahead as growth gets challenged in an economic recession on a relative basis.

Comparison with Peer ETFs

I mentioned there are a number of value ETFs out there to choose from. Two ETFs that operate in a similar space as IUSV are the Capital Group Dividend Value ETF ( CGDV ) and the Dimensional U.S. Targeted Value ETF (DFAT).

CGDV, with $3 billion in assets and an expense ratio of 0.33%, and DFAT, with $8 billion in assets and an expense ratio of 0.29%, are both viable alternatives to IUSV. However, IUSV stands out with its significantly larger assets under management ($14 billion) and a lower expense ratio of 0.04%.

The Case for Value Investing

While growth stocks have dominated the market in recent years, there's a case to be made for value investing, especially considering the outperformance of growth stocks this year. Value stocks, such as those that IUSV invests in, are traditionally seen as undervalued and have the potential to provide better returns over the long term.

Moreover, value stocks could offer better downside protection in a bear market, making them a potentially safer bet for long-term investors. Given IUSV's transparent and modest active risk approach to value investing, it could be an excellent addition to an investor's portfolio. Just keep in mind this is a relative argument, not an absolute one.

For further details see: