2023-08-08 11:21:36 ET
Summary
- The Vanguard Mega Cap Value ETF is outperforming the broad market averages after #1 holding Berkshire Hathaway announced strong Q2 earnings on Saturday.
- The MGV ETF invests in undervalued stocks, trading at a discount to the S&P500, and has outperformed the index over the past 3 years.
- With a low expense fee (0.07%) and attractive yield (2.45%), the MGV ETF is an attractive option for investors looking to build a well-diversified portfolio.
- Other top holdings include Exxon, J&J, Broadcom, Procter & Gamble, and Chevron.
The Vanguard Mega Cap Value ETF ( MGV ) outperformed the broad market averages on Monday (see graphic below) after its #1 holding, Berkshire Hathaway ( BRK.B ), announced strong Q2 earnings on Saturday. At the end of the quarter, Berkshire held $147.4 billion in cash and cash equivalents. Warren Buffet recently said the company continues to buy short-term U.S. Treasuries despite the recent debt downgrade. Note that a 5% yield on Berkshire's cash position equates to annual income of an estimated $7.37 billion. Meantime, the MGV ETF is also overweight other relatively defensively oriented value companies like UnitedHealth Group ( UNH ), Exxon Mobil ( XOM ), Johnson & Johnson ( JNJ ), and Procter & Gamble ( PG ) in its top-10 holdings.
Investment Thesis
The MGV ETF invests in the largest value stocks in the U.S. markets. These stocks typically trade at a significant valuation discount to the S&P500 and, as a result, can serve investors looking for portfolio diversification. Indeed, as shown in the graphic below, the MGV ETF trades at a 28.8% discount as compared to the P/E ratio of the S&P500 - as represented by the Vanguard S&P 500 ETF ( VOO ) - and a whopping 36.6% discount on a price-to-book basis:
The flip-side of the coin, of course, is that the S&P500 has a significantly higher earnings growth rate and ROE as compared to the MGV ETF. However, given that the MGV ETF has significantly outperformed the S&P500 on a total returns basis over the past 3-years (see below), and that some financial analysts are still predicting a (already long predicted ...) recession, investors may want to consider adding some capital to the mega-cap value space.
I started covering the MGV ETF on Seeking Alpha about one year ago, with the BUY-rated article MGV: Vanguard's Mega-Cap Value ETF Is A Winner . Since that time, the ETF has returned 5.8%, roughly 2.8% less than the S&P500. In December, I again recommended MGV with a Christmas theme (see MGV: Put A Bow On It ) . Note that from a P/E and price-to-book perspective, the recent bull-run (or at least a "mini" bull-run ...) in the S&P500 YTD has widened the discount of MGV to the S&P500. That being the case, the prospects for "value" outperforming in the 2H of this year have risen in my opinion. And, given MGV's relatively low expense fee (0.07%) and its current 2.45% yield, it is a very attractive value-oriented option for investors to consider. In addition, as you will see below, the MGV ETF has actually outperformed the S&P500 over the past 3-years and has an excellent long-term performance track record.
With that as background, let's take a closer look at the ETF to see how it has positioned investors for success going forward.
Top-10 Holdings
The top-10 holdings in the MGV ETF are shown below and were taken directly from the Vanguard MGV ETF webpage where investors can find more information on the fund.
Berkshire is the #1 holding in the MGV ETF with a 3.9% weight. As mentioned earlier, BRK.B's Q2 earnings report was strong. Highlights included:
- Operating earnings of $10.0 billion increased from $8.01 billion in Q1 and $9.42 billion in Q2 of last year (+6.2% yoy).
- Insurance underwriting came in at $1.25 billion vs. $715 million in Q2 2022.
- GEICO pretax underwriting earnings were $514 million vs. a loss of $487 million in the year-ago quarter.
- Investment and derivative gains, most of which are unrealized, were driven by an increase in Berkshire's #1 equity holding - Apple ( AAPL ) - and were $25.9 billion in Q2 compared with a loss of $53. billion in the year-ago quarter.
Despite all the press about Berkshire's stake in Occidental Petroleum ( OXY ), according to HedgeFollow , OXY stock is not a top-5 holding in the Berkshire equity portfolio (it comes in at #6) and the company has a much larger stake in Chevron ( CVX ):
Meantime, Berkshire - which famously and ironically does not pay a dividend even though Buffet loves dividends - bought back ~$1.4 billion of its common stock during Q2. That compares with $4.4 billion in buybacks during the previous quarter. Berkshire "B" shares are +23.8% over the past year. Note that Berkshire has a 1.63% weight in the S&P500, so its weighting in the MGV ETF is more than 2.3x that allocation.
The #2 holding with a 3.3% weight is UnitedHealth. Shares in the diversified healthcare company are down 4.6% over the past year. The forward P/E is now at 20.3x and the shares yield 1.5%. On Monday, Credit Suisse named UNH one of three stocks that made its "Top of the Crop List" as the best-of-the-best stocks to own (along with Apple and Amazon ( AMZN )).
Exxon is the #3 holding with a 3.2% weight. Despite strong production growth in the company's two key assets (i.e. the Permian Basin and Guyana) this year, the stock is relatively flat YTD due to weaker yoy O&G prices. Exxon pays a $3.64/share annual dividend which is good enough for a 3.39% yield. That said, investors were less than impressed when Exxon raised the quarterly dividend by only 3-cents given record windfall profits last year driven by the impact Russia's horrific war-of-choice on Ukraine had on the global energy markets, which saw oil & gas prices skyrocket.
Broadcom ( AVGO ), which my followers know is one of my favorite technology stocks, is the #6 holding with a 2.6% weight. Broadcom has not only been one of the best dividend growth stocks in the entire S&P500 over the past 5-years (the annual dividend is currently $18.40/share), but shares are up 61% over the past year. Indeed, shares are +30% since my last Seeking Alpha BUY rated article in May (see Broadcom: How AI Will Influence Q2 Earnings ).
The fact that Broadcom is up 60%+ over the past year, yields 2.1%, is well-positioned to benefit from AI, yet still qualifies for inclusion in this "value" ETF explains exactly why AVGO is one of my favorite technology stocks - right up there with Google ( GOOG ). Note that Google ended Q2 with $118 billion in cash - not quite as much as Berkshire Hathaway, but GOOG has been buying back much more stock ($29.5 billion so far this year) than BRK.B and arguably has a superior free-cash-flow margin (see Q2 Surprise: Google Generated $2 Billion More FCF Compared to Microsoft ).
In aggregate, the MGV ETF also has direct exposure to global consumers via a 4.5% combined weight in the #7 and #10 holdings: Procter & Gamble and PepsiCo ( PEP ).
Overall, the MGV portfolio has the highest exposure to the HealthCare, Financials, and Industrials sectors:
The Technology Sector, with only 9.4% versus a 28.3% weight in the S&P500's "IT" allocation, is perhaps the largest differentiator in this value oriented ETF versus VOO and can serve as a good way for investors to gain portfolio diversification.
Performance
The MGV ETF is not only a cost-efficient fund, but with an 10-year average return of 10.4%, it also has a very attractive long-term performance track record
The graphic below compares the 5-year total returns of the MGV ETF versus some of its peers, including the Schwab U.S. Large-Cap Value ETF ( SCHV ), the Invesco Dynamic Large Cap Value ETF ( PWV ), and its sister-fund the Vanguard Value ETF ( VTV ):
As can be seen, the MGV ETF is the leader of the pack of the funds chosen for the comparison.
Dividends are paid quarterly and the vast majority of the payout will be categorized as "qualified" dividend income. That being the case, MGV is a relatively tax-efficient fund. The last 4 quarterly dividend declarations are shown below:
Risks
The MGV ETF is certainly not immune to global economic and geopolitical factors such as high inflation, higher interest rates, and higher oil and gas prices. That said, MGV's relatively defensive and value-oriented portfolio should out-perform the broad market averages (i.e. the VOO and (QQQ) funds) if there were to be a significant market downturn.
Summary & Conclusion
The MGV ETF is an attractive fund for investors who want to build and maintain a well-diversified portfolio. It is significantly differentiated from the S&P500, has a much lower technology weight as compared to the Nasdaq-100, and pays a significantly higher yield as compared to the S&P500 (2.45% vs. 1.53% ). With a 0.07% expense fee, the MGV ETF is a cost-efficient fund with a strong long-term performance track record. MGV is a BUY.
I'll end with a 10-year total returns comparison of the MGV ETF versus the broad market averages as represented by the VOO ETF, the DJIA ETF ( DIA ), and the triple Q's:
As can be seen in the graphic, the MGV ETF is at the bottom of the group. While I own the MGV ETF for reasons of diversification, this is the main reason that I have allocated significantly more capital to the other three broad market ETFs shown (and I advise investors to do the same). Indeed, the cornerstone of my own personal portfolio is the S&P500. However, at this stage in the market - and after the big rally this year - it might be a good time for investors to allocate some capital to the large-cap value space.
For further details see:
MGV: #1 Holding Berkshire Powers Vanguard's Mega-Cap Value ETF