IUSV - VOOV: Long Live Value

2023-09-24 07:00:00 ET

Summary

• Tech stocks are vulnerable to a sharp decline, making growth portfolios risky.
• The Vanguard S&P 500 Value ETF is a strong fund for large-cap value exposure.
• VOOV has performed well, has diversified holdings, and offers a compelling case for investors seeking value exposure.

Price is what you pay. Value is what you get. - Warren Buffett

Value is dead.

Long live value.

I've been warning about concentration risk driven by AI mania for several months now, and I think I'm going to be proven right that tech stocks are vulnerable to a sharp decline. If that happens, any portfolio that's tilted towards a growth-style of investing would get hit, as growth portfolios tend to be heavily weighted in Tech.

But what about value? The Vanguard S&P 500 Value ETF ( VOOV ) seeks to emulate the performance of the S&P 500 Value Index. It's an equity fund that focuses on large-cap value stocks, employing a passively managed, full-replication strategy. The fund strives to stay fully invested, and its low expenses help minimize net tracking error.

When we look at the price ratio of VOOV to the Russell 1000 Growth, that chart sure looks like it's going through a reversal where value beats growth.

VOOV's Performance History

This is a strong fund as a passive proxy of large-cap value. Relative to its peers, it's performed well.

Holdings

VOOV's top ten holdings include companies such as Microsoft Corp., Meta Platforms Inc., Amazon, Berkshire Hathaway Inc., and JPMorgan Chase & Co. As for top 10 concentration, the cumulative weighting is more dispersed than many growth proxies, arguably making this less susceptible to large-cap idiosyncratic risk which I believe is a massively underappreciated risk by most investors in headline averages.

Sector Diversification

VOOV's sector diversification is well-balanced. Financials account for 19.2% of the fund, followed by Information Technology (18.2%), Industrials (12.3%), Consumer Discretionary (11.1%), Communication Services (9.9%), Health Care (8.6%), Consumer Staples (6.8%), Utilities (4.8%), Real Estate (4.4%), Materials (3.1%) and Energy (1.6%). The lowered Technology exposure overall I find to be a positive if you're going to be an equity investor here.

Comparison with Peer ETFs

There's quite a few options when it comes to investing in value-tilted ETFs. For instance, the iShares Core S&P U.S. Value ETF ( IUSV ) is another large-cap value fund that has some solid attention. Another comparable ETF is the iShares S&P 500 Value ETF ( IVE ), which also seeks to track the investment results of an index composed of large-capitalization U.S. equities that exhibit value characteristics. Sector compositions and fees are comparable, so it's really more an argument of personal preference.

Making the Case for VOOV

VOOV presents a compelling case for investors looking for large-cap value exposure at this point in the cycle. The fund has outperformed the growth style on a relative basis recently and may continue to do so, indicating its potential for higher relative returns. However, it's crucial to note that because VOOV is still an equity fund, it would be susceptible to declines in a risk-off environment, and the Financials exposure would be a drag should a credit event be underway. This is a very good fund and I'm far more constructive on value more broadly than growth. Just keep in mind this is a relative argument, not an absolute one (yet).

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