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3 Ultra Cheap Value ETFs for Long Term Outperformance

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With gradually improving economy and better-than-expected corporate earnings, investors have continued to put money into stocks. However, with stock market indexes in record territories, many investors are growing increasingly concerned about stretched valuations.

It comes as no surprise that ETFs holdings value stocks have been in favor with investors of late, beating their growth focused counterparts. Also, while growth premium appears justified in a slow economic growth environment, many investors avoid paying extra premium when the economy is clearly strengthening and corporate earnings growth is easier to come by.

Value Stocks Outperform over Long Periods

Researchers have come up with different explanations for the “value premium”, ever since Fama and French published their famous research paper in 1992, showing outperformance of value stocks over growth stocks over long term.

Numerous academic studies conducted since then have shown that value stocks have delivered higher returns with lower volatility compared with growth stocks over the long term in almost all the markets studied. (Read: Guide to Dividend Aristocrat ETFs)

As growth stocks shine in certain market cycles and value stocks in some others, allocation to both styles in a portfolio works best. But given their proven performance over long term, value stocks and funds should be a predominant part of any ‘core’ portfolio. Further large cap companies with solid balance sheets and stable cash flows are less risky and thus more suitable for long term investors. (Read: 3 Low Risk ETFs beating SPY this year)

Are Cheaper Funds Better?

Expense ratios are an important factor in the return of an ETF and in the long-term, cheaper funds can significantly outperform their more expensive cousins, other things remaining the same.

The following table shows how high expanses can affect fund returns. In the example, we put $10,000 in three funds, with annual expense ratios of 0.10%, 0.50% and 1.00% respectively and assumed that all three of them returned 8% per annum. (See: 3 Biggest Mistakes of ETF Investing)

The difference in total returns (after expenses) becomes very significant as we increase the holding period. For the purpose of simplicity of calculations, we have ignored transaction costs and taxes.

Initial Value

($10,000)

($10,000)

($10,000)

Expense Ratio

0.10%

0.50%

1.00%

Annual Return

8%

8%

8%

Value after 10 years

$21,390

$20,610

$19,672

Value after 20 years

$45,754

$42,479

$38,697

Value after 30 years

$97,869

$87,550

$76,123

We may add that expense ratio is not the only cost involved in investing in an ETF but it usually is the major cost, however investors need to look at other implicit costs too in addition to expense ratio.

Below, we have analyzed three large cap value ETFs with ultra-low expense ratios that should be considered by investors for their long-term, core portfolios.

Schwab U.S. Large-Cap Value ETF (SCHV)

SCHV provides broad exposure to large-cap U.S. stocks with value style characteristics, representing about half of the market capitalization of stocks in the Dow Jones U.S. Large Cap Total Stock Market Index.

Launched in December 2009, the fund has so far been able to attract assets worth $1.1 B, which are invested in 361 holdings. With an annual fee of just 7 basis points, this product is the cheapest option in the space. Additionally, the dividend yield at 2.3% is quite attractive.

Exxon, GE and Chevron are the top three holdings. With top ten holdings accounting for about 34% of the asset base, the fund is well diversified.

SCHV is a Zacks Rank #2 (Buy) ETF.

Vanguard Value ETF (VTV - Free Report)

VTV follows a full-replication approach to track the performance of the CRSP US Large Cap Value Index. With AUM of more than $15 billion and an expense ratio of just 9 basis points, this is one of the most popular funds within the space.

Exxon, J&J, GE, Chevron and Microsoft are among the top holdings. The fund is quite well diversified with top ten holdings accounting for just about 27% of the asset base.
VTV is a Zacks Rank #2 (Buy) ETF.

Vanguard Russell 1000 Value ETF (VONV)

VONV tracks the Russell 1000 Value Index, which predominantly comprises value stocks of large U.S. companies.

The fund charges a low expense ratio of 15 basis points while the SEC yield is attractive at 2.2% currently.  Looking at the holdings-- Exxon, GE, Chevron, Wells Fargo and J&J occupy the top spots. The fund holds 692 stocks with top ten holdings accounting for about 25% of the asset base.

VONV is a Zacks Rank #2 (Buy) ETF.

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