These are some of the best value ETFs to buy now.
Value stocks are those thought by the market to be underpriced relative to their true fundamentals. These stocks are often those of more “boring” companies in less flashy sectors, such as consumer staples, consumer defensive, health care, manufacturing and industrial stocks. These companies generally have lower price-earnings (P/E), price-sales (P/S), price-book (P/B) and price-free cash flow (P/FCF) ratios. These criteria exclude the high-valuation growth and tech stocks that outperformed over the last decade, such as Apple Inc. (ticker: AAPL) and Tesla Inc. (TSLA). Value stocks are generally perceived as riskier, and the theory is that over long periods of time, investors might be compensated for that risk with better returns, called the “value premium.” While investors can undertake research to pick individual value stocks, an easier and less time-consuming approach is to buy a value exchange-traded fund, or ETF. Here’s a list of the seven best value ETFs to buy for 2022.
Vanguard Value ETF (VTV)
Up first is the Vanguard Value ETF. VTV passively tracks the performance of the CRSP U.S. Large Cap Value Index, holding a total of 349 stocks. The ETF offers good exposure to the value factor, with an average P/E and P/B ratio of 15.8 and 2.6, respectively, both of which are lower than the broader S&P 500 index. The composition of VTV is more balanced as well, with more allocated to the health care (18.7%), industrial (13.8%), financial (21%) and consumer staples (10.8%) sectors. This makes VTV much less tech-heavy compared with the S&P 500. Its top holdings include Berkshire Hathaway Inc. (BRK.B), Johnson & Johnson (JNJ) and Proctor & Gamble Co. (PG). VTV is very popular among passive value investors, having attracted assets under management, or AUM, of $146.1 billion. The fund is very cheap, with a management expense ratio, or MER, of just 0.04%, or $4 per $10,000 invested annually.
Vanguard S&P Small-Cap 600 Value ETF (VIOV)
Small-cap stocks are those that have a market capitalization of $300 million to $2 billion. Like value stocks, small-cap stocks tend to be riskier, and investors may also be compensated for that over the long run with a premium. Combining small-cap and value factors together in a portfolio is called a small-cap value tilt, which can be a way of generating excess returns over time. To capture this, investors can buy the Vanguard S&P Small-Cap 600 Index ETF. VIOV is passively managed and tracks the performance of small-cap value stocks in the S&P 600 Index, which employs an earnings screen to weed out unprofitable small-cap companies. The fund has more exposure to the value factor than VTV does, with lower P/E and P/B ratios of 13.7 and 1.5, respectively. The fund is high-risk, high reward — the combination of small-cap and value stocks make for very volatile movements, and a long holding period is necessary to see consistent returns. VIOV has attracted AUM of $1.4 billion and has an MER of 0.15%.
iShares Russell 2000 Value ETF (IWN)
Beyond the S&P 600 Index, there are other small-cap indexes as well, such as the Russell 2000 Index. The iShares Russell 2000 Value ETF takes this a step further by adding a value screen to include only the 1,436 stocks in the Russell 2000 that meet its criteria. As a result, IWN achieves average P/E and P/B ratios of 12.07 and 1.54, respectively. The Russell 2000 is more popular than the S&P 600 when it comes to small caps, and as a result IWN has attracted higher AUM of $14.9 billion. However, IWN is more expensive than VIOV, with an MER of 0.24%. This is to be expected, as IWN holds over twice as many stocks as VIOV does, which incurs higher trading and management fees. As with most small-cap value funds, IWN is more volatile than the market, with a beta of 1.24 compared with the market beta of 1.
Avantis U.S. Small Cap Value ETF (AVUV)
Unlike the previous passively managed funds, the Avantis U.S. Small Cap Value ETF employs active management. AVUV uses a proprietary algorithm to select stocks that demonstrate low valuations combined with high profitability. The fund also employs a momentum screener to make investment decisions based on changes in current prices. This active management approach seems to be working, with AVUV’s year-to-date and one-year trailing performance handily beating its benchmark, the Russell 2000 index. However, this active management does come at a higher cost, with an MER of 0.25%. Still, Avantis has an established reputation for well-performing factor investing strategies, and its small-cap value funds shouldn’t be overlooked based on higher fees. Since its inception in 2019, AVUV has grown significantly, with a current AUM of $2.9 billion.
Invesco S&P 500 Pure Value ETF (RPV)
Investors looking for more of a “pure” value play in large caps should consider the Invesco S&P 500 Pure Value ETF. RPV employs a more sophisticated screening process than most passively managed index funds. RPV assesses each stock in the S&P 500 by assigning it two “style scores,” for value and growth. The ratio between the stock’s value score and growth score are then tabulated to rank each stock as either deep value, blend or deep growth. RPV will only hold stocks scored as deep value, then it favors the stocks with the highest deep value scores. Currently, RPV has 124 holdings, which are rebalanced annually. The scoring system appears to be effective, with RPV having average P/E and P/B ratios of 10.89 and 1.31, respectively, lower than the previously mentioned ETFs. RPV will cost you an MER of 0.35% to hold.
Vanguard Russell 1000 Value ETF (VONV)
If the lower number of stocks held by VTV bothers you, consider buying the Vanguard Russell 1000 Value ETF instead for broader diversification. VONV holds a total of 850 stocks, which track the performance of the Russell 1000 Value Index, a commonly used barometer of large-cap value U.S. stock returns. VONV is very similar to VTV, with the same top holdings, but with slightly less weighting to them owing to the larger number of other stocks held. VONV’s P/E and P/B ratios are also comparable to VTV at 16.1 and 2.4, respectively. Although VONV is functionally identical to VTV, they do track different indexes, so a good use of VONV could be as a tax-loss harvesting partner for VTV. VONV currently has AUM of $9.1 billion and an MER of 0.08%.
iShares MSCI USA Value Factor ETF (VLUE)
Last on the list is the iShares MSCI USA Value Factor ETF. VLUE passively tracks the MSCI USA Enhanced Value Index, which currently holds 150 U.S. large- and mid-cap stocks. VLUE has average P/E and P/B ratios of 10.82 and 1.77, respectively, giving it decent exposure to the value factor. If you’re looking for a less risky value ETF, VLUE might be the better pick here, with a lower beta of 1.09. This makes it just slightly more volatile than the overall market, which might be desirable for investors not accustomed to seeing large fluctuations in their portfolio. Top holdings in VLUE include well-known U.S. blue-chip stocks like Intel Corp. (INTC), Cisco Systems Inc. (CSCO), Ford Motor Co. (F) and AT&T Inc. (T). The presence of these stocks gives VLUE a decent dividend yield of 2.5%, which is paid quarterly. VLUE has attracted $13.1 billion in AUM and currently charges an MER of 0.15%.
The 7 best value ETFs to buy and hold in 2022:
— Vanguard Value ETF (VTV)
— Vanguard S&P Small-Cap 600 Value ETF (VIOV)
— iShares Russell 2000 Value ETF (IWN)
— Avantis U.S. Small Cap Value ETF (AVUV)
— Invesco S&P 500 Pure Value ETF (RPV)
— Vanguard Russell 1000 Value ETF (VONV)
— iShares MSCI USA Value Factor ETF (VLUE)
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