7 Best Value ETFs to Buy for Bundled Bargains
Could value stocks finally have their day? If so, these are seven of the best value ETFs to leverage a long-awaited revival.
Value stocks might finally have their day – and that means great things for a host of long-maligned value exchange-traded funds (ETFs).
Growth has been running up the score against value for more than a decade. However, after a string of underperformance that dates back to 2007, value might finally be poised to flip the script.
Headlines pointing toward progress on COVID-19 vaccines and treatments alike have sparked hope that America will continue its economic comeback. They're also looking like a potential catalyst for scores of stocks that were driven into deep value territory earlier in 2020.
"Positive vaccine news is a catalyst for value stocks," says Brandes Investment Partners analyst Brent Fredberg. "The news, paired with the near-record valuation gap between value and growth stocks, could bode well for a sustained, multi-year rotation toward value outperformance."
Indeed, value stocks have outperformed growth in every economic recovery since 1929, Fredberg adds.
While some investors might prefer to pick out individual value stocks, others looking to reduce their risk might want to consider value ETFs instead. Exchange-traded funds allow investors to tap into dozens, even hundreds of value-priced equities, typically at just a few dollars in management fees annually.
Read on as we examine seven of the best value ETFs you can buy.
Data is as of Nov. 11. Yields represent the trailing 12-month yield, which is a standard measure for equity funds.
Vanguard Value ETF
- Assets under management: $56.4 billion
- Dividend yield: 3.1%
- Expenses: 0.04%, or $4 annually on $10,000 invested
We'll start out with one of the largest and lowest-cost options in the space, which typically means a look at a Vanguard ETF.
In this case, the Vanguard Value ETF (VTV, $113.60) is the largest among value ETFs by about $14 billion in assets, and it's tied with a few category funds as the cheapest, at just 4 basis points (a basis point is one one-hundredth of a percent).
You get a diversified portfolio of more than 330 U.S. stocks that are selected based on a variety of value metrics, including price-to-book (P/B), historic price-to-earnings (P/E), forward price-to-earnings (forward P/E), price-to-dividend (P/D) and price-to-sales (P/S).
VTV has a heavy large-cap tilt. About 85% of the fund's assets invest in large companies such as top holdings Berkshire Hathaway (BRK.B), Johnson & Johnson (JNJ) and Procter & Gamble (PG). The rest is sprinkled among larger mid-cap stocks.
Healthcare, which often straddles the line between value and growth, is the largest sector represented at 20% of assets. But most of the other top sectors are more orthodox value areas: financials (18%), industrials (12%) and consumer staples (12%).
VTV is inexpensive and straightforward, making it a high-quality core holding for investors seeking value exposure.
Fidelity Value Factor ETF
- Assets under management: $233.6 million
- Dividend yield: 2.0%
- Expenses: 0.29%
The Fidelity Value Factor ETF (FVAL, $38.29) is another bundle of value stocks with a different makeup and a different way of getting there.
FVAL is based on the Fidelity U.S. Value Factor Index, which uses four metrics equally to determine attractively valued companies: free cash flow (FCF) yield, enterprise value (EV)-to-earnings before interest, taxes, depreciation and amortization (EBITDA), price-to-tangible book value, and forward P/E. In the case of banks, it uses a 50-50 blend of price/tangible book and forward P/E.
The portfolio itself is a little more spread out across company size – 74% of assets are invested in large caps, versus 16% in mid-caps and 7% in smalls.
But perhaps more striking is the heaviest weight in the portfolio: information technology (27.1%), which is traditionally considered a growth sector. Indeed, top holdings – including Apple (AAPL), Microsoft (MSFT), Amazon.com (AMZN) and Alphabet (GOOGL) – look like what you'd typically see atop a blended large-cap fund.
There's a good lesson here: Some funds determine value differently, so it pays to check under the hood. That's not to say that FVAL's way of gauging value is any better or worse than VTV or the rest of the value ETFs on this list … it's just to say that you should always check out what's under the hood.
To Fidelity Value Factor's credit, this methodology has worked out for the young fund, which came to life in September 2016. Its three-year average annual return of 9.2% puts it in the 90th percentile of category ETFs.
Distillate U.S. Fundamental Stability & Value ETF
- Assets under management: $195.7 million
- Dividend yield: 0.9%
- Expenses: 0.39%
While we're on the topic of different valuation methods, let's look at another young fund: the Distillate U.S. Fundamental Stability & Value ETF (DSTL, $34.79), which launched on Oct. 23, 2018.
Many value ETFs (including VTV and FVAL) utilize metrics such as P/E and P/S to measure value. However, DSTL is hyper-focused on free cash flow (the cash profits left over after a company does any capital spending necessary to maintain the business) divided by its enterprise value (another way to measure a company's size that starts with market capitalization, then factors in debt owed and cash on hand).
This "free cash flow yield" is much more reliable than valuations based on earnings, says Thomas Cole, CEO and co-founder of Distillate Capital. That's because companies tend to report multiple types of profits – ones that comply with generally accepted accounting principles (GAAP), but increasingly, ones that don't, too.
DSTL starts out with 500 of the largest U.S. companies, then weeds out ones that are expensive based on its definition of value, as well as those with high debt and/or volatile cash flows. Like FVAL, the resulting portfolio has a few eyebrow-raisers, including information technology as the largest holding at a quarter of assets, and top holdings including the likes of Alphabet and Amgen (AMGN).
But it's hard to argue with performance. DSTL is categorized by Morningstar as Large Blend rather than Large Value, so its ranking doesn't reflect its true competition. But over the past year, it has delivered 18.1% total returns – roughly 18 percentage points better than the Large Value category average.
No wonder, then, that assets have more than tripled since we included it in our list of the 20 best ETFs to buy for 2020.
"We think value works. We don't think it ever really stopped working," says Thomas Cole, CEO and co-founder of Distillate Capital. "What has stopped working are the metrics that legacy value investors have been most associated with."
Nuveen ESG Large-Cap Value ETF
- Assets under management: $598.7 million
- Dividend yield: 1.7%
- Expenses: 0.35%
Increasingly, investors are becoming interested in companies that are trying to "do better" – whether it's by their employees or the world around them. That has led to an explosion in popularity of products centered around environmental, social and corporate governance (ESG) qualities.
The Nuveen ESG Large-Cap Value ETF (NULV, $31.71) is one such product, blending the value factor with ESG qualities. Specifically, NULV tracks the TIAA ESG USA Large-Cap Value Index, which includes equities that "adhere to predetermined ESG, controversial business involvement and low-carbon screening criteria."
But while the name says "large-cap," the portfolio is more "medium-large." Only about two-thirds of the portfolio is invested in large-cap stocks, with the sizable remainder put into mid-caps, which typically are considered "growthier" than their bigger brethren.
The financial sector leads here, at more than 18% of assets, followed by large slugs of healthcare (14%), consumer staples (12%), industrials (12%) and information technology (11%). The nearly 170-stock portfolio isn't terribly lopsided, either – top three holdings Procter & Gamble, Walt Disney (DIS) and Verizon Communications (VZ) collectively make up less than 10% of assets.
iShares Russell Mid-Cap Value ETF
- Assets under management: $10.8 billion
- Dividend yield: 2.4%
- Expenses: 0.24%
Some investors might prefer a more concentrated portfolio of mid-caps. And why not? Mid-cap stocks are often considered a "goldilocks" investment – they typically have greater resources and access to capital than small caps, but they frequently boast better growth potential than larger firms.
And for that, we're going to look to another popular source of low-cost core products: iShares.
The iShares Russell Mid-Cap Value (IWS, $90.52) is a wide collection of nearly 700 U.S. mid-cap stocks that feature lower price-to-book metrics than their peers. However, the fund also boasts a lower P/E ratio and a higher dividend yield than the category average, even though those metrics aren't part of IWS's value methodology.
The sector breakdown here is a bit different than the other funds we've looked at so far. While industrials (17%) and financials (15%) aren't much of a surprise as far as weightings go, you do get much more exposure to consumer discretionary (12%) and real estate (10%) than you would in many large-cap value ETFs.
SPDR S&P 600 Small Cap Value ETF
- Assets under management: $2.3 billion
- Dividend yield: 1.9%
- Expenses: 0.15%
While small-cap stocks are typically renowned for their growth potential, some experts believe that there's room for a value component when investing in small companies.
Of course, like value broadly, small-cap value has struggled in recent years. But several signals – including wide spreads between the yields of small-cap value and the S&P 500 – have indicated that more diminutive small caps might be ready to bounce back.
Here, we'll tap State Street's SPDR line of ETFs.
The SPDR S&P 600 Small Cap Value ETF (SLYV, $58.73) is a simple slice-and-dice of the S&P Small Cap 600 Index, which includes U.S. companies typically between $600 million and $2.4 billion in market value. SLYV is looking for stocks that have attractive valuations based on P/B, P/E and P/S.
At the moment, most of the S&P 600 qualifies – SLYV holds some 450 stocks with an average P/E of about 15. You're deeply invested in financials here, at 23% of the portfolio, with significant slugs in consumer discretionary (16%) and industrials (16%), as well as a double-digit weight in healthcare (10%).
Holdings here tend to fall under the radar compared to those in the aforementioned value ETFs. You might not know top holding Capri Holdings (CPRI), though you're probably familiar with its Versace, Jimmy Choo and Michael Kors brands. Top holdings also include firms such as fluids and lubricants provider Quaker Chemical (KWR) and prepaid debit card firm Green Dot (GDOT).
FlexShares International Quality Dividend Defensive ETF
- Assets under management: $65.6 million
- Dividend yield: 3.9%
- Expenses: 0.47%
The overarching connection among the other best value ETFs on this list has been their focus on domestic equities. But international diversification is important, and you can achieve that with a value tilt via the FlexShares International Quality Dividend Defensive ETF (IQDE, $21.16).
While the IQDE isn't a value ETF in ideology, Morningstar categorizes it within Foreign Large Value, and its methodology typically results in a value-focused portfolio. At the moment, about half of assets are invested in value stocks, with another 35% in "core" and 15% in growth.
IQDE takes a group of international dividend payers and scores them based on management efficiency, profitability and cash flow, then further filters for dividend quality. It then applies various diversification controls so no single stock, industry group, sector, country, region and other factors are over-represented.
That doesn't mean IQDE is a perfectly balanced fund. Countries such as Japan (13%) and the U.K. (11%) have more sway than, say, Germany (3.3%) and Spain (3.2%). Financials are the top weight at 18%, followed by consumer discretionary (12%) and consumer staples (10%).
You also get diversification by size: Large caps are about 60% of the portfolio, with another 30% in mid-caps and the rest in small caps or cash.
If you're looking for a more traditional foreign value fund, you could always look at the likes of iShares MSCI EAFE Value ETF (EFV) or Fidelity International Value Factor ETF (FIVA). But if you're not as concerned with purity, IQDE provides ample value exposure while also providing defense and dividends.