VUG - New Year New Style: Vanguard Value ETF Priced Well Heading Into 2024

2023-11-29 11:50:36 ET

Summary

• Bond market traders are indicating that Fed rate cuts are on the way, leading to a potential improved backdrop for large-cap value stocks.
• The Vanguard Value ETF has underperformed growth stocks in 2023, but the gap could close next year.
• VTV is a large ETF with a high dividend payout rate and favorable trading metrics, making it an attractive investment option.
• I highlight key price levels to watch heading into year-end.

Fed rate cuts are finally on the way. That's clearly what bond-market traders are pointing to, according to the CME's FedWatch Tool. Following dovish statements from Fed officials, namely the FOMC's Waller, earlier this week, the US 10-year government bond yield fell to near 4.3% after approaching 5% back in October. Recall how steeply rising rates hurt some value stocks, such as regional banks over the first half of the year - an easing of rate volatility and a steeper yield curve could lead to an improved backdrop for large-cap value stocks.

I have a buy rating on the Vanguard Value ETF (VTV). The bank-heavy allocation has underperformed the growth style significantly in 2023, but I think that gap could close next year.

4 Rate Cuts Priced Into 2024

Vanguard Value Near Flat in 2023, Vanguard Growth +41%

For background, VTV seeks to track the performance of the CRSP US Large Cap Value Index, which measures the investment return of large-cap value stocks, according to Vanguard . The fund provides a low-cost way to match the performance of many of the nation's largest value stocks and employs a passively managed, full-replication approach.

VTV is a very large ETF with nearly $140 billion in assets under management and it pays a yield that is about a full percentage point above the payout rate of the S&P 500. With share-price momentum that has been decent lately, I will detail key price levels on the chart to monitor as we approach the usually bullish December stretch. The ETF's tiny 0.04% annual expense ratio earns the fund an A+ ETF Grade rating by Seeking Alpha and it has somewhat favorable risk metrics. Finally, liquidity is strong with this massive ETF - average daily trading volume is 2.6 million shares and Vanguard notes that the median 30-day bid/ask spread is just a single basis point.

Digging into the portfolio, the 4-star, gold-rated fund by Morningstar is not quite as concentrated in the large-cap value quadrant of the style box as you might think. Notice in the box below that barely more than one-third of the allocation is considered large-cap value. Thus, diversification is apparent with 38% in large-cap blend, and more than a quarter of VTV is mid-cap. With a price-to-earnings ratio of just 13 and long-term earnings growth north of 9%, the PEG ratio is decent. The momentum factor, which has recovered lately, is not all that impressive with this ETF, but Morningstar's factor profile confirms that volatility is low.

VTV: Portfolio & Factor Profiles

What has caused VTV to underperform its growth ETF counterpart (VUG) by nearly 40 percentage points so far on the year is the sector breakdown. Financials make up the biggest percentage of the Vanguard Value allocation while the Information Technology sector's weight is barely more than 10% - with VUG, it's 45%. The S&P 500 (SPY)'s tech sector weight is currently 29.7%.

VTV: Sector And Dividends Information

Seasonally, VTV tends to rally sharply into year-end, with a gain in the so-called "Santa Claus Rally" period - the last 5 trading sessions of the year and the first pair of trading days in the new year, according to data from Equity Clock . A choppy period often ensues from mid-January through mid-April in the ETF's 16-year history.

VTV: Bullish Seasonal Trends Through Early January

The Technical Take

Amid all the dramatic stock market moves over the past three years, VTV and SPY are flat to each other. The value-style ETF beat the SPX in a big way in 2022, but those relative gains have vanished in the last 11 months. Notice in the chart below that there are now two key price points investors must monitor. First, support is seen in the $130 to $131 area - there was a double bottom put in place at the March SVB bottom and when the Q3-Q4 correction finished this past October.

On the upside, I spot resistance between $147 and $148 - peaks from December 2022 and at the summer 2023 high. The fund's all-time high is only about $10 away, and a strong year-end rally and a healthy beginning to the new year could get the ETF there. But with a high amount of volume by price up to $147 or so, it could still be tough sledding for the bulls in the very near term. Also take a look at the RSI momentum oscillator at the top of the graph - it recently broke out from a downtrend, so that is a modestly encouraging sign for near-term price action. Finally, the long-term 200-day moving average is flat in its slope, suggesting there's no clear trend.

Overall, VTV's technical situation is neutral, but a move above $148 should help get VTV back toward its all-time highs.

VTV: A Persistent Trading Range, Bullish RSI Move

VTV's Relative Rally in 2022, Relative Weakness in 2023

The Bottom Line

I am bullish VTV heading into 2024. Year-ends often mark inflections in sector and style trends, and with a low valuation, though a mixed chart, leaning bullish on VTV appears favorable.

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