2024-01-02 10:11:09 ET
Summary
- Vanguard Value Index Fund ETF Shares is the largest value ETF in the market.
- It is much weaker than some of its peers, including VFVA, COWZ, and AVUV.
- A look at VTV, and some of its peers, follows.
The Vanguard Value Index Fund ETF Shares ( VTV ) is the largest, most well-known value index exchange-traded fund, or ETF, in the market. It is also a comparatively weak one, with lower returns, more expensive valuations, and, in my opinion, weaker investment strategies than some of its peers. Of these, three stand out:
- First, the Vanguard U.S. Value Factor ETF ( VFVA ), with a broadly similar strategy to VTV, but a more concentrated, targeted portfolio.
- Second, the Pacer US Cash Cows 100 ETF ( COWZ ), which focuses on U.S. companies with particularly strong free cash flow yields. Cash is king, and so COWZ's strategy and holdings seem particularly effective.
- Third, the Avantis US Small Cap Value ETF ( AVUV ), which focuses on cheaply valued U.S. small-caps. Although the fund is riskier and less diversified than most, it has achieved particularly strong returns in the past.
The three funds above have stronger performance track-records and cheaper valuations than VTV. In my opinion, they are stronger investment opportunities too, so I would not be investing in VTV at the present time.
VTV - Quick Overview
VTV is a simple index ETF investing in U.S. large-cap value stocks, broadly defined as those with below-average prices, based on most well-known valuation metrics.
VTV's underlying index is quite broad, which results in an incredibly well-diversified fund, with investments in 342 different securities from most relevant industry segments. The fund is overweight old-economy industries like financials and industrials, due to their cheap valuations, and underweight tech and telecommunications, for the opposite reason.
Most of the fund's largest holdings are well-known blue-chips like Berkshire Hathaway ( BRK.B ) and Johnson & Johnson ( JNJ ), but it also includes smaller mid-cap companies like Annaly Capital ( NLY ) and Dell ( DELL ). Largest holdings are as follows.
VTV's looks quite a bit cheaper than the S&P 500 as represented by Vanguard S&P 500 ETF (VOO), as expected.
Of special note is the fact that VTV shares many similarities to the S&P 500, with most of the fund's holdings being included in said index.
and with a 46% overlap by weight between the fund and said index:
The issues above are an important fact for investors to consider. Funds with more marked difference to the S&P 500 offer greater potential for outperformance, although risks are obviously higher, too.
Although there is nothing inherently wrong with the fund or its holdings, its performance is an entirely different matter. VTV has moderately underperformed the S&P 500 since inception, and for most relevant time periods.
VTV's underperformance was almost entirely due to value, as a factor, underperforming growth since 2008. This was, in turn, mostly due to the significant outperformance of a few tech mega caps , including Apple ( AAPL ) and Microsoft ( MSFT ).
Although VTV underperformed due to tough industry conditions, fact of the matter is that several value ETFs have managed to perform much better in spite of these same difficulties. These funds might offer investors similar, but stronger, value propositions to VTV. Let's have a look at these.
VFVA - Smart Beta U.S. Value ETF
VFVA is an actively-managed U.S. value ETF, using a rules-based quantitative model to evaluate U.S. common stocks, and investing in those with below-average valuations relative to fundamentals. Actively-managed funds with use rules-based investment methodologies are sometimes referred to as smart beta funds, and are something of a cross between index and active funds.
VFVA is a reasonably well-diversified fund, with investments in 571 companies from most relevant industry segments. Industry weights are a bit more lopsided relative to VTV, with more energy and financials, and even less tech and telecommunications.
VFVA targets smaller companies too, with a median market cap of $7.7B compared to $111.5B for VTV. These figures somewhat exaggerate the differences, as even though the median VFVA investment is small, most of its larger holdings are, well, large.
VFVA has two main benefits over VTV.
It is much cheaper.
and it has a much stronger performance track-record.
VFVA is not without its risks and negatives, with the fund being less diversified and riskier than VTV. Still, it seems a broadly similar, stronger investment opportunity.
COWZ - Cash Cow ETF
COWZ is an equity index ETF, investing in the 100 companies with the highest FCF yields within the Russell 1000 index, a broad-based U.S. equity index. A quick summary of the fund's index / security selection.
COWZ's focus on free cash flow ("FCF") is relatively rare amongst value funds, and, in my opinion, a positive. Earnings can be massaged, accounting book values rarely conform to actual market prices, but cash flow doesn't (easily) lie, and is generally an accurate measure of a company's financial performance.
COWZ is moderately diversified, with investments in 100 companies, and with exposure to several industry segments.
COWZ's strategy and portfolio is much more aggressive than that of VTV, and that most broad-based value index ETFs. This is partly due to having a more concentrated portfolio of 100 holdings versus 342 for VTV, and partly due to weighting by FCF, which ensures a portfolio focused on companies with particularly cheap valuations.
Due to the above, COWZ is significantly overweight energy, the cheapest industry, and much more so than VTV or most value ETFs.
COWZ has a much cheaper valuation too, for the same reasons.
and a much stronger performance track-record as well:
COWZ is also riskier and less diversified than VTV, with a significant overweight position in the volatile energy industry. Still, I do believe it to be a stronger U.S. large-cap value ETF.
AVUV - Actively-Managed U.S. Small-Cap Value ETF
AVUV is an actively-managed U.S. Small-Cap Value ETF. Although the fund is actively-managed, it tries to provide investors with diversified exposure to its equity market niche , with investments in over 700 securities from most relevant industry segments. As is the case with most value funds, AVUV is overweight old-economy industries like financials and industrials, underweight growth industries like tech and communication services.
Notwithstanding the above, the fund targets a very specific market niche, and offers no diversification beyond said niche. AVUV excludes almost all well-known blue-chips like Microsoft ((MSFT)) and Johnson & Johnson ((JNJ)), oil majors, and some entire industries like health care and real estate. AVUV is materially more concentrated than most other equity funds, including VTV and COWZ, with all the benefits and downsides that entails.
AVUV is much cheaper than VTV:
and has a much stronger performance track record too:
AVUV is riskier than VTV too, but seems a broadly stronger investment opportunity, in my opinion at least.
Conclusion - No Reason to Buy
Vanguard Value Index Fund ETF Shares is the largest, most well-known value index ETF in the market. It also seems much weaker than several of its peers, including VFVA, COWZ, and AVUV. As such, I see no reason to invest in the fund at the present time.
For further details see:
Consider Selling VTV, Buying These Value ETFs Instead