6 Great ETFs for Owning Value Stocks
Value stocks have taken a backseat to growth stocks recently.
Over the past three years, the Russell 3000 Value index, which tracks bargain-priced stocks among America’s 3,000 largest companies, has lagged the Russell 3000 Growth index, which focuses on fast-growing—and often highly valued—U.S. stocks, by an average of 3.0 percentage points per year. Eventually, though, this kind of divergence will end, and investors will move away from growth stocks and toward value stocks. In that spirit, we searched for attractive, value-oriented exchange-traded funds. Here are our six favorites.
Returns and other figures are through December 3.
PowerShares S&P 500 Low Volatility Portfolio
- Symbol: SPLV
Expense ratio: 0.25%
One-year return: 3.4%
Three-year annualized return: 14.0%
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As ETFs go, this isn’t the cheapest fund, but it’s cheap enough. Fees aside, the fund has delivered on the promise of its name. Since it opened in May 2011, the ETF has been almost 25% less volatile than Standard & Poor’s 500-stock index. Plus, since its inception, the ETF’s 12.9% annualized return edged the index by an average of 0.7 percentage point per year.
There’s nothing complicated about this fund: It tracks an index that includes the 100 least volatile stocks in the S&P 500 over the past 12 months. The less downside the fund experiences, the thinking goes, the better the performance over the long haul. The fund’s top three holdings at last report: Coca-Cola (KO), Plum Creek Timber (PCL), and Clorox (CLX).
We are intrigued by the midsize- and small-company versions of this fund, PowerShares S&P MidCap Low Volatility (XMLV) and PowerShares S&P SmallCap Low Volatility (XSLV). Over the past two years, each beat 99% of its respective peer group—with less volatility, of course. But we’d like to see a longer track record, as well as heartier assets in both, before we officially recommend them.
Schwab U.S. Dividend Yield ETF
- Symbol: SCHD
Expense ratio: 0.07%
One-year return: -1.8%
Three-year annualized return: 14.1%
This fund, a member of the Kiplinger ETF 20, wins kudos for its ultralow annual fee. No other value-oriented ETF is cheaper.
The index it tracks, the Dow Jones U.S. Dividend 100 index, starts with U.S. companies that have paid dividends for at least 10 years in a row and that have a market value of at least $500 million. It then considers such factors as dividend yield, dividend growth rate and return on equity (a measure of profitability) to make the final cut. The portfolio currently holds 101 stocks and yields 3.2%, compared with 2.1% for the S&P 500. The fund’s top three holdings: Microsoft (MSFT), Procter & Gamble (PG) and Johnson & Johnson (JNJ).
Vanguard High Dividend Yield ETF
- Symbol: VYM
Expense ratio: 0.10%
One-year return: -1.6%
Three-year annualized return: 14.1%
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Not all dividend stock funds are alike. Some focus on high-quality firms that have a history of consistently increasing dividends; others focus on high-yielding stocks, whether or not the payouts are boosted regularly.
This fund falls in the latter group, but don’t assume its portfolio is full of distressed companies. The index behind this fund ranks all dividend-paying U.S. stocks by yield, then lops off the smaller half of the list as measured by market value. This process recently left 436 large-company stocks, which the index weights by market value. The top three holdings recently included Microsoft (MSFT), ExxonMobil (XOM) and General Electric (GE). The fund yields 3.3%.
Vanguard Mid-Cap Value ETF
- Symbol: VOE
Expense ratio: 0.09%
One-year return: -0.2%
Three-year annualized return: 17.0%
Fund researcher Morningstar says this ETF’s 0.09% expense ratio is “razor thin.” We agree, and it’s just one of the reasons we like Vanguard Mid-Cap Value.
Another is that the ETF focuses squarely on midsize companies. The average market capitalization of the fund’s holdings is $10.3 billion, which is in line with most midcap stock indexes. Finally, this ETF clearly falls in the value camp. Like its large- and small-cap counterparts, Mid-Cap Value replicates an index that corrals stocks that are cheap in relation to earnings, sales and book value (assets minus liabilities). The ETF yields 2.0%. Top holdings are Fidelity National Information Services (FIS), Hartford Financial Services Group (HG) and ConAgra Foods (CAG).
Vanguard Small-Cap Value ETF
- Symbol: VBR
Expense ratio: 0.09%
One-year return: -0.6%
Three-year annualized return: 15.3%
Over the past three years, this ETF has been less volatile than the typical small-company value ETF, and it boasts a total return that ranks among the top 1% of its peers.
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What’s more, it is the cheapest small-company value ETF you can buy. Like its siblings, Vanguard Mid-Cap Value and Vanguard Value, Small-Cap Value tracks an index that focuses on value measures, including price to book value and dividend yield. The ETF currently holds 843 stocks with an average market value of $2.9 billion. Top three holdings: Global Payments (GPN), Goodyear Tire & Rubber (GT) and JetBlue Airways (JBLU). The fund currently yields 2.0%.
Vanguard Value ETF
- Symbol: VTV
Expense ratio: 0.09%
One-year return: -1.6%
Three-year annualized return: 15.1%
Large-company value stocks tend to be a little drab—typically, they are well-established firms with modest profitability and below-average growth potential. This ETF, for instance, holds 322 stocks in well-known firms such as ExxonMobil, Johnson & Johnson and Microsoft. The index it tracks includes more than 300 of the biggest firms in the U.S. stock market that fit several measures of value, including price to earnings, price to sales and dividend yield.
Vanguard Value has returned 7.0% annualized since it launched in early 2004, which trails the S&P 500 by an average of 0.2 percentage point per year. You can invest in more than three dozen large-company value ETFs, but few cost as little as this. Plus, Vanguard Value has a current yield of 2.6%.
