3 Great Value ETFs for 2023

Ryan Jackson: For value investors, patience is not a virtue—it’s a requirement. Value investing, which involves surfing the stock market’s clearance rack for undervalued companies, has a strong long-term track record. But success has come with setbacks, sometimes for decades at a time. In the 2010s, for example, growth stocks powered a torrid bull market while value companies toiled in their trail.

Patient value investors have seen their faith rewarded more recently, as value stocks roared back to life in the early 2020s. Investors that want to try to tap into the value resurgence may consider the following ETFs, which have demonstrated their merit across value’s rises and falls.

3 Great Value ETFs for 2023

These exchange-traded funds earn a Morningstar Analyst Rating of Silver and Bronze.

1. SPDR S&P Dividend ETF SDY
2. iShares S&P Small-Cap 600 Value ETF IJS
3. Invesco FTSE RAFI Developed Market ex-U.S. ETF PXF

First up is SPDR S&P Dividend ETF, which trades under the ticker SDY. This portfolio of dividend diehards earns a Morningstar Analyst Rating of Silver.

Unlike most value strategies, SDY does not focus on finding cheap stocks. Instead, it only admits U.S. companies that have increased their dividend in each of the past 20 years. Stocks that meet that demanding requirement—125 of them at the end of February—are weighted by their dividend yield, which turns SDY into a de facto value strategy.

Filtering out all but the most committed dividend companies gives this fund what many value strategies lack: stability. Its holdings tend to be mature, profitable firms that absorb the market’s bumps and show limited bruises. That helped it rank within the top 10% of the mid-cap value category over the 15 years through February 2023.

Investors that want to think smaller may consider iShares S&P Small-Cap 600 Value ETF, ticker IJS. This fund’s low fee and broad diversification earn it a Bronze Morningstar Analyst Rating.

This fund’s cut-and-dried construction makes sense. It sweeps in stocks representing the cheaper half of the S&P SmallCap 600 Index and weights them by market capitalization. Market-cap weighting channels the market’s consensus view on each stock’s relative value, using the wisdom of the crowd to its advantage. This approach also keeps turnover and trading costs under wraps, which adds to the fund’s low-cost profile.

Like SDY, this index fund curbs the risks attached to cheaper, smaller stocks. The S&P SmallCap 600 Index screens new constituents for profitability, turning away those that don’t meet its standards. Combined with the fund’s broad reach and market-cap weighting, this simple screen pushed the fund’s risk-adjusted performance into the top 20% of small-value strategies over the past 15 years.

Value investing works as well outside the U.S.’s borders as it does within them. With that in mind, the final ETF for today is Silver-rated Invesco FTSE RAFI Developed Market ex-U.S. ETF, ticker PXF.

This fund captures the value factor with a unique approach. It ranks stocks from the FTSE Developed All Cap ex U.S. Index by sales, cash flow, dividends, and book value, and includes the top 1000, weighting them by the same metrics. At each rebalance, PXF increases exposure to stocks that have become cheaper relative to these measures and trims those that have become more expensive.

Focusing on fundamentals steers the portfolio clear of frothy stocks and primes it to exploit cheap prices in market recoveries. However, ignoring stock prices can lead this fund to cling to losing stocks and prematurely cut ties with winners.

That drawback has clearly proved surmountable: PXF has ranked within the top 25% of all foreign large-value funds over the 15 years through February 2023. Its returns tend to be uneven, but investors that can stomach the quiet stretches have been rewarded for their conviction before.

Watch “3 Great ETFs for Your IRA in 2023″ for more from Ryan Jackson.