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After years of underperformance, value investing came back. This is especially true as the S&P 1500 value index is down just 0.2% in the first quarter while the S&P 1500 growth index is down 8.6% (read: U.S. Stocks Log Worst Q1 in 2 Years: Top-Ranked ETFs Shine).
While there are many options available in the stock world, investors could tap the strength in value in the basket form through ETFs. iShares Core S&P U.S. Value ETF (IUSV - Free Report) , SPDR Portfolio S&P 500 Value ETF (SPYV - Free Report) , Vanguard Mid-Cap Value ETF (VOE - Free Report) , iShares Morningstar Mid-Cap Value ETF (IMCV - Free Report) and Vanguard Russell 1000 Value ETF (VONV - Free Report) look compelling choices.
Reasons to Bet on Value
The outperformance came on the back of several factors. The market uncertainty led by skyrocketing inflation, Fed’s aggressive rate hikes and Russia’s invasion of Ukraine has made investors jittery, thereby raising the appeal for value investing.
This is because value stocks have strong fundamentals — earnings, dividends, book value, and cash flow — that trade below their intrinsic value and are undervalued by the market. These seek to capitalize on the inefficiencies in the market and have the potential to deliver higher returns with lower volatility compared with their growth and blend counterparts. Value stocks are less susceptible to trending markets and their dividend payouts offer safety in times of market turbulence.
Growth stocks have become too expensive after a 10-year super cycle, compelling investors to dump them as the era of low interest rates ended. The Fed has raised rates by 25 bps for the first time since 2008 and expects to follow a more aggressive path to fight the 40-year high inflation. The current pricing suggests a 0.5% bps hike in May and a cumulative boost of 2.5% to benchmark rates through the end of the year, from the near-zero level at the start of 2022. This has resulted in a spike in yields.
Higher yields indicate optimism in the economy backed by increased consumer confidence, rising wages and higher spending. This combination of factors will result in increased industrial activity and a pickup in consumer demand, thereby lifting value stocks. Additionally, the ongoing Russia-Ukraine war has led to supply disruption fears in an already-tight commodity market, thereby resulting in amplified inflation worries.
Further, the U.S. Treasury bond yield curve inverted for the first time in three years, signaling U.S. recession. This means that the yield on the two-year Treasury note was higher than that of the 10-year note. In such a scenario, value investing seems a perfect choice (read: Yield Curve Inverts: Which Value ETFs Should You Buy Now?).
How to Pick Right Value ETFs?
Value ETFs offer different approaches to investors. Some ETFs are passively managed and directly track indexes, while some are actively managed. Other products are quantitative driven or apply some techniques or strategies. Some value ETFs also screen for leverage and earnings, put on sector restrictions and reweight or re-evaluate their portfolios as often as daily.
As such, it is a difficult task to select the five choices from the long list. Still, we have tried to find them using various metrics such as solid Zacks ETF Rank #1 (Strong Buy) or 2 (Buy), a lower expense ratio of below 0.10%, as well as higher diversification benefits in terms of sectors and individual stocks.
Let’s discuss the above-mentioned ETFs in detail below:
iShares Core S&P U.S. Value ETF offers exposure to large- and mid-cap U.S. equities that exhibit value characteristics by tracking the S&P 900 Value Index. It holds 745 stocks in its basket, with each accounting for no more than 3.1% share. iShares Core S&P U.S. Value ETF is widely spread across sectors with health care, financials, industrials, information technology and consumer staples.
iShares Core S&P U.S. Value ETF has AUM of $12.2 billion and trades in an average daily volume of 634,000 shares. It charges 4 bps in annual fees and has a Zacks ETF Rank #1.
SPDR Portfolio S&P 500 Value ETF tracks the S&P 500 Value Index, charging investors 4 bps in annual fees. It holds 449 stocks in its basket, with each accounting for no more than 3.4% of assets. Health care, financials, industrials, information technology and consumer staples are the top five sectors with double-digit exposure each.
SPDR Portfolio S&P 500 Value ETF has amassed $14.7 billion in its asset base and sees an average daily volume of 3.8 million shares. It charges 4 bps in annual fees.
Vanguard Mid-Cap Value ETF follows the CRSP US Mid Cap Value Index, which measures the investment return of mid-capitalization value stocks. It holds 204 stocks in its basket, with each accounting for less than 1.2% of assets. Financials, consumer discretionary, real estate, industrials and utilities are the top five sectors with double-digit exposure each.
Vanguard Mid-Cap Value ETF has amassed $17.1 billion and trades in an average daily volume of 505,000 shares. It charges 7 bps in fees per year and has a Zacks ETF Rank #1.
iShares Morningstar Mid-Cap Value ETF offers exposure to mid-sized U.S. companies and follows the Morningstar US Mid Cap Broad Value Index. It holds 384 stocks in its basket, with each accounting for less than 1.05% share. Financials, industrials and utilities are the top three sectors with double-digit exposure each (read: Here's Why Mid-Cap ETFs Can be Good Bets Amid the War Crisis).
iShares Morningstar Mid-Cap Value ETF has amassed $532 million in its asset base and trades in volume of 28,000 shares a day on average. It charges 6 bps in annual fees and has a Zacks ETF Rank #2.
Russell 1000 Value ETF targets the large-cap value segment of the broad market by tracking the Russell 1000 Value Index. It holds 850 stocks in its basket, with each accounting for less than 3% share. Russell 1000 Value ETF is widely spread across sectors, with financials, health care, and industrials taking double-digit allocation each.
With AUM of $7.4 billion, Russell 1000 Value ETF charges 8 bps and trades in an average daily volume of 453,000 shares. VONV has a Zacks ETF Rank #1.
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5 ETFs to Bet on Value Comeback
After years of underperformance, value investing came back. This is especially true as the S&P 1500 value index is down just 0.2% in the first quarter while the S&P 1500 growth index is down 8.6% (read: U.S. Stocks Log Worst Q1 in 2 Years: Top-Ranked ETFs Shine).
While there are many options available in the stock world, investors could tap the strength in value in the basket form through ETFs. iShares Core S&P U.S. Value ETF (IUSV - Free Report) , SPDR Portfolio S&P 500 Value ETF (SPYV - Free Report) , Vanguard Mid-Cap Value ETF (VOE - Free Report) , iShares Morningstar Mid-Cap Value ETF (IMCV - Free Report) and Vanguard Russell 1000 Value ETF (VONV - Free Report) look compelling choices.
Reasons to Bet on Value
The outperformance came on the back of several factors. The market uncertainty led by skyrocketing inflation, Fed’s aggressive rate hikes and Russia’s invasion of Ukraine has made investors jittery, thereby raising the appeal for value investing.
This is because value stocks have strong fundamentals — earnings, dividends, book value, and cash flow — that trade below their intrinsic value and are undervalued by the market. These seek to capitalize on the inefficiencies in the market and have the potential to deliver higher returns with lower volatility compared with their growth and blend counterparts. Value stocks are less susceptible to trending markets and their dividend payouts offer safety in times of market turbulence.
Growth stocks have become too expensive after a 10-year super cycle, compelling investors to dump them as the era of low interest rates ended. The Fed has raised rates by 25 bps for the first time since 2008 and expects to follow a more aggressive path to fight the 40-year high inflation. The current pricing suggests a 0.5% bps hike in May and a cumulative boost of 2.5% to benchmark rates through the end of the year, from the near-zero level at the start of 2022. This has resulted in a spike in yields.
Higher yields indicate optimism in the economy backed by increased consumer confidence, rising wages and higher spending. This combination of factors will result in increased industrial activity and a pickup in consumer demand, thereby lifting value stocks. Additionally, the ongoing Russia-Ukraine war has led to supply disruption fears in an already-tight commodity market, thereby resulting in amplified inflation worries.
Further, the U.S. Treasury bond yield curve inverted for the first time in three years, signaling U.S. recession. This means that the yield on the two-year Treasury note was higher than that of the 10-year note. In such a scenario, value investing seems a perfect choice (read: Yield Curve Inverts: Which Value ETFs Should You Buy Now?).
How to Pick Right Value ETFs?
Value ETFs offer different approaches to investors. Some ETFs are passively managed and directly track indexes, while some are actively managed. Other products are quantitative driven or apply some techniques or strategies. Some value ETFs also screen for leverage and earnings, put on sector restrictions and reweight or re-evaluate their portfolios as often as daily.
As such, it is a difficult task to select the five choices from the long list. Still, we have tried to find them using various metrics such as solid Zacks ETF Rank #1 (Strong Buy) or 2 (Buy), a lower expense ratio of below 0.10%, as well as higher diversification benefits in terms of sectors and individual stocks.
Let’s discuss the above-mentioned ETFs in detail below:
iShares Core S&P U.S. Value ETF (IUSV - Free Report)
iShares Core S&P U.S. Value ETF offers exposure to large- and mid-cap U.S. equities that exhibit value characteristics by tracking the S&P 900 Value Index. It holds 745 stocks in its basket, with each accounting for no more than 3.1% share. iShares Core S&P U.S. Value ETF is widely spread across sectors with health care, financials, industrials, information technology and consumer staples.
iShares Core S&P U.S. Value ETF has AUM of $12.2 billion and trades in an average daily volume of 634,000 shares. It charges 4 bps in annual fees and has a Zacks ETF Rank #1.
SPDR Portfolio S&P 500 Value ETF (SPYV - Free Report)
SPDR Portfolio S&P 500 Value ETF tracks the S&P 500 Value Index, charging investors 4 bps in annual fees. It holds 449 stocks in its basket, with each accounting for no more than 3.4% of assets. Health care, financials, industrials, information technology and consumer staples are the top five sectors with double-digit exposure each.
SPDR Portfolio S&P 500 Value ETF has amassed $14.7 billion in its asset base and sees an average daily volume of 3.8 million shares. It charges 4 bps in annual fees.
Vanguard Mid-Cap Value ETF (VOE - Free Report)
Vanguard Mid-Cap Value ETF follows the CRSP US Mid Cap Value Index, which measures the investment return of mid-capitalization value stocks. It holds 204 stocks in its basket, with each accounting for less than 1.2% of assets. Financials, consumer discretionary, real estate, industrials and utilities are the top five sectors with double-digit exposure each.
Vanguard Mid-Cap Value ETF has amassed $17.1 billion and trades in an average daily volume of 505,000 shares. It charges 7 bps in fees per year and has a Zacks ETF Rank #1.
iShares Morningstar Mid-Cap Value ETF (IMCV - Free Report)
iShares Morningstar Mid-Cap Value ETF offers exposure to mid-sized U.S. companies and follows the Morningstar US Mid Cap Broad Value Index. It holds 384 stocks in its basket, with each accounting for less than 1.05% share. Financials, industrials and utilities are the top three sectors with double-digit exposure each (read: Here's Why Mid-Cap ETFs Can be Good Bets Amid the War Crisis).
iShares Morningstar Mid-Cap Value ETF has amassed $532 million in its asset base and trades in volume of 28,000 shares a day on average. It charges 6 bps in annual fees and has a Zacks ETF Rank #2.
Vanguard Russell 1000 Value ETF (VONV - Free Report)
Russell 1000 Value ETF targets the large-cap value segment of the broad market by tracking the Russell 1000 Value Index. It holds 850 stocks in its basket, with each accounting for less than 3% share. Russell 1000 Value ETF is widely spread across sectors, with financials, health care, and industrials taking double-digit allocation each.
With AUM of $7.4 billion, Russell 1000 Value ETF charges 8 bps and trades in an average daily volume of 453,000 shares. VONV has a Zacks ETF Rank #1.