Although the S&P 500 has returned more than 13% over the past year and the Nasdaq Composite has reclaimed the much celebrated 5,000, investors have not shied away from value exchange traded funds.
Over long-term holding periods, value stocks have historically outpaced their grown counterparts, explaining why the Guggenheim S&P 500 Pure Value ETF (NYSEArca: RPV) is one of the top-performing broad market ETFs since the current bull market began in March 2009.
RPV targets the cheapest third of the S&P 500 Index and weights its holdings by the strength of their value characteristics,” according to Morningstar analyst Alex Bryan. [A Focused Value ETF]
The iShares S&P 500 Value ETF (NYSEArca: IVE) and the Vanguard Value ETF (NYSEArca: VTV) are two well-known value ETFs. Last year, the pair slightly lagged the S&P 500. Over the past three years, VTV and IVE are up a more than respectable 56% on average.
“As new innovating ETFs gain traction that hedge foreign currencies or U.S. interest rates, it is easy to forget that many investors are using plain vanilla products to build asset allocation strategies. However, we are concerned that they are focusing on finding the ETFs with the lowest expense ratios rather than understanding what’s inside these ETFs,” said S&P Capital IQ in a new research note.
VTV is a goliath among value ETFs with over $19 billion in assets under management, $1.17 billion of which have come into the fund this year. As is the case with so many Vanguard ETFs, VTV has gained a following due to its paltry expense ratio. VTV charges just 0.09% per year, making it less than expensive than 92% of competing funds, according to issuer data.
The ETF tracks the CRSP US Large Cap Value Index, which measures the investment return of large-capitalization value stocks, according to Vanguard. [Vindicated Value ETFs]
“Unlike the S&P Dow Jones Index followed by IVE, CRSP uses a different approach, involving ‘packeting’, which allows a holding to be shared between two indices of the same family and cushions movement between indices. In other words, a stock can be in both the CRSP Large Cap Value and Large Cap Growth indices,” said S&P Capital IQ.
VTV allocated almost 22% of its weight to the financial services sector and 14.4% to healthcare at the end of February. Eight of the ETF’s top 10 holdings are Dow components with Wells Fargo (NYSE: WFC) and Berkshire Hathaway (NYSE: BRK-B) the outliers.
The $8.29 billion IVE, which turns 15 in May, holds 363 stocks with 24.4% hailing from the financial services sector. Although its P/E ratio has not dropped in unison with oil prices, the energy sector is IVE’s second-largest sector weight at 13.3%.
IVE’s top 10 holdings include six Dow components with Berkshire Hathaway , AT&T (NYSE: T), Bank of America (NYSE: BAC) and Citigroup (NYSE: C) the outliers.
“Both ETFs earn a top overall ranking from S&P Capital IQ, but they are not identical and as such understanding how they fit into a broader asset allocation strategy is warranted,” said S&P Capital IQ.
The research firm rates both ETFs overweight.
Vanguard Value ETF
