Ben Johnson: It's no secret that value stocks have struggled to keep up with their growth counterparts for years. After a few fits and starts, it looks like they could finally be turning a corner. For the year to date through May 24, the Morningstar US Value Index had dipped 2%, while the Morningstar US Growth Index plummeted nearly 34%. Can we call it a comeback? Maybe. Though dyed-in-the-wool value investors, like LL Cool J, would argue they've been here for years.
The first value ETF on my list is as plain-vanilla as they come. Vanguard Value ETF trades under the ticker VTV and carries a Morningstar Analyst Rating of Gold. VTV tracks the CRSP U.S. Large Cap Value Index, which includes stocks that represent the cheaper half of the U.S. market. The index weights stocks by market cap, which is an efficient approach that channels the market's collective wisdom and helps dial back turnover and the associated trading costs, with help from comprehensive index buffers.
The portfolio's sector composition, value-growth tilt, and market-cap orientation all approximate the contours of the average peer in the U.S. large-value Morningstar Category average. By mimicking the shape of its average peer, this fund amplifies the impact of its distinct cost advantage—it charges just 0.04% per year—and positions the fund for solid category-relative performance over the long run.
The second ETF on my list is a bit more exotic. IShares MSCI USA Value Factor ETF, which traded under the ticker VLUE, takes a sector-relative approach to portfolio construction, uncovering stocks that are truly cheap relative to their peers, and it shields the fund from sector biases that plague most traditional value indexes. This unique advantage should help the fund outpace the Russell 1000 Value Index, which is its Morningstar Category index, over the long run and earns the fund a Morningstar Analyst Rating of Silver.
This index strategy compares stocks' value characteristics, their cheapness, to their sector peers', which distinguishes it from most value indexes. Rather than favor traditionally value-friendly sectors, like financials and real estate, this portfolio absorbs cheap stocks all over the market. It anchors its sector composition to the broad market as well, which further curbs any unintended sector bets. Avoiding the sector biases that most value index funds tend to develop is an advantage, as it's not a form of active risk that the market will always reward. This fund, as a result, may take heavier stakes in sectors that become overvalued, but we think that's a worthy trade-off.
The third and final ETF on my list balances a value tilt with broad diversification. Avantis U.S. Equity ETF—which carries the ticker AVUS—offers mild factor tilts that should provide a long-term edge. This broad, low-cost fund earns a Morningstar Analyst Rating of Bronze.
The fund offers broad exposure to stocks of all sizes listed in the U.S. and tilts toward those with lower price/book multiples and higher profitability. In doing so, it effectively leans toward factors that historically have been associated with superior long-term returns. This should give the fund an edge when those styles are in favor. The portfolio's emphasis on stocks with lower valuations has been persistent. But its preference for profitable companies has been less obvious because cheaper stocks tend to be less profitable than their larger and faster-growing counterparts. However, the fund's profitability tilt is still at work behind the scenes, even if its holdings, on average, generate lower returns on invested capital than the market. Incorporating profitability into the mix paints a more complete picture about each stock's expected return and should steer the portfolio away from lower-quality names.
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