Historically, which has outperformed: value stocks or growth stocks? If your gut reaction is to lean toward growth stocks, especially given their success in recent years, you may be under the spell of recency bias. The data tell a different story.
“The interesting thing about growth versus value is that market preference between the two can persist for many quarters or even years,” says Kendall Dilley, portfolio manager at Vineyard Global Advisors. “The market has gone through alternating and prolonged periods of growth outperformance (1995 to 2000 and 2000 to 2020) and value outperformance (2000 to 2006 and 2021 to present).”
From 1972 to the present, U.S. large-cap value stocks have outpaced their growth counterparts, posting an annualized return of 11.1% compared to 10.5%. Even in 2022, a year fraught with market volatility, value stocks demonstrated remarkable resilience, losing just 2.2% compared to the staggering 33.2% drop experienced by growth stocks.
“During periods of higher inflation and interest rates, the value factor has historically outperformed the broader market, as it did during 2022,” says Daniel Dusina, director of investments at Blue Chip Partners. “Similarly, at the start of a new business cycle, like the end of a recession, value has typically outperformed the broader market.”
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But what exactly is value? “Value is buying something at a price that is attractive relative to what you are getting,” says Eduardo Repetto, chief investment officer at Avantis Investors. “Many confuse value as just being something that is low priced, but a low price due to low profits or a weak balance sheet is not necessarily value — those are companies that have a low price because they deserve one and do not present an attractive investment opportunity.”
Famous value investors like Benjamin Graham and Warren Buffett built their fortunes on these tenets. Graham, often dubbed the “father of value investing,” emphasized the importance of a margin of safety and intrinsic value, teaching that intelligent investing is about paying less than an asset’s worth.
Buffett, his most famous pupil, refined this approach by adding a qualitative analysis of businesses and focusing on downtrodden companies with durable competitive advantages — or what he famously calls a “wide moat.”
The concept of value investing gained further refinement and empirical support thanks to Nobel Prize laureates Eugene Fama and Kenneth French. Their pioneering work led to the three- and, later, five-factor models of equity returns, which incorporate value as one of the key factors driving an investment’s long-term expected returns.
“The value premium is underpinned by straightforward logic: All else being equal, paying a lower price for a stock and its future cash flows can lead to higher expected returns,” says Marlena Lee, global head of investment solutions at Dimensional Fund Advisors. “Solutions designed around the drivers of higher expected returns — including value — can be a sensible way to orient portfolios to potentially outperform benchmarks.”
Here are seven of the best value ETFs to buy in 2023:
| Fund | Expense ratio |
| Vanguard Value ETF (ticker: VTV) | 0.04% |
| SPDR Portfolio S&P 500 Value ETF (SPYV) | 0.04% |
| Dimensional U.S. Marketwide Value ETF (DFUV) | 0.22% |
| Dimensional U.S. Targeted Value ETF (DFAT) | 0.28% |
| Avantis U.S. Equity ETF (AVUS) | 0.15% |
| Avantis U.S. Large Cap Value ETF (AVLV) | 0.15% |
| Avantis All Equity Markets Value ETF (AVGV) | 0.26% |
Vanguard Value ETF (VTV)
“If you are looking at a long-term, buy-and-hold retirement investment, consider a passive value ETF,” says Anessa Custovic, chief investment officer at Cardinal Retirement Planning Inc. “These will track an index and have lower fees than an actively managed ETF.” A highly popular pick from Vanguard with over $100 billion in assets that fits these criteria is VTV.
By tracking the CRSP U.S. Large Cap Value Index, VTV provides exposure to some 340 U.S. value stocks, with a focus on large-cap value. The ETF has a bias toward financial and health care sector stocks, with notable names including Berkshire Hathaway Inc. (BRK.A, BRK.B), UnitedHealth Group Inc. (UNH), Johnson & Johnson (JNJ) and JPMorgan Chase & Co. (JPM). VTV charges a 0.04% expense ratio.
SPDR Portfolio S&P 500 Value ETF (SPYV)
“ETFs are a great way of gaining exposure to the value factor because it’s difficult to identify it,” Custovic says. “You need a lot of fundamental data and intensive bottom-up analysis to identify a potential value stock, and most retail investors don’t have the expertise or time to do this.” Another great low-cost ETF for implementing a hands-off value investing strategy is SPYV, which also charges a 0.04% expense ratio.
As its name suggests, this ETF tracks the S&P 500 Value Index, which picks stocks from the broader S&P 500 index screened for low price-to-book, price-to-earnings and price-to-sales ratios. Currently, the ETF has just over 400 holdings. Because SPYV’s definition of value differs from VTV, the ETF includes different names like Microsoft Corp. (MSFT), Amazon.com Inc. (AMZN) and Meta Platforms Inc. (META).
Dimensional U.S. Marketwide Value ETF (DFUV)
“Dimensional has decades of experience helping investors with our rules-based approach, which incorporates profitability alongside size and value into security selection and uses daily implementation to maintain consistent focus on the asset class,” Marlena says. A great example of this is DFUV, which charges a 0.22% expense ratio and has a low 3% annual turnover thanks to its rules-based strategy.
DFUV targets U.S. stocks that have a low price-to-book value, in addition to price-to-cash-flow and P/E ratios. The ETF also screens for robust profitability by checking for high earnings and profits from operations relative to its book value and assets. Since its inception in 1998, the mutual fund version of DFUV has returned an annualized 7.7%, beating the Russell 3000 Value Index’s return of 7.3%.
Dimensional U.S. Targeted Value ETF (DFAT)
Value investors willing to dive deeper in their search for undervalued companies can consider DFAT in lieu of DFUV for greater exposure. Whereas DFUV has an aggregate price-to-book ratio of 1.8, DFAT clocks in lower at 1.3, meaning that on average, the stocks in DFAT are more undervalued compared to their book value than the stocks in DFUV.
Moreover, DFAT also has a much greater focus on small-cap stocks compared to DFUV, sporting a weighted average total market cap of $4.3 billion versus $126.8 billion. Given that size is another one of the Fama-French factors, focusing on smaller value stocks could help DFAT outperform more over time. The ETF charges a 0.28% expense ratio.
[READ: 7 Small-Cap Value ETFs to Buy in 2023]
Avantis U.S. Equity ETF (AVUS)
“Index ETFs try to control costs and turnover by rebalancing their investments on only a few predefined days during the year, disregarding changes in prices or fundamentals in between rebalancing dates,” Repetto says. This can be counterintuitive to a value investing strategy where investors may want to sell holdings once they have exceeded their intrinsic value.
For investors who agree with Repetto and are looking for broad diversification but also some value exposure, AVUS offers that at a 0.15% expense ratio by overweighting undervalued stocks with higher profitability. The ETF is actively managed, meaning that the fund manager is not bound to an index. The ETF is able to sell holdings that have appreciated in price and are no longer undervalued in a timely manner.
Avantis U.S. Large Cap Value ETF (AVLV)
AVUS incorporates a moderate value tilt, but otherwise contains many of the same non-value stocks that broad market indices capture, albeit at lower weightings. The ETF is designed to be a core holding for investors who want to capture the market return, but also have some tilt toward value stocks. For a more pure-play value investing strategy, Avantis also offers AVLV at an identical 0.15% expense ratio.
“AVLV focuses on U.S. large-cap companies that have good profitability and balance sheets, but that are trading at relatively low prices,” Repetto says. “A company with an attractive price along with strong fundamentals means that the market is implying a higher-than-average discount rate for that company, which is a good indication of higher expected returns.”
Avantis All Equity Markets Value ETF (AVGV)
A popular core holding among passive, long-term investors is the Vanguard Total World Stock ETF (VT), which provides exposure to over 9,000 globally diversified stocks at a 0.07% expense ratio. For value investors, a similar level of global diversification can now be achieved with AVGV, which uses an “ETF of ETFs” structure to wrap five other Avantis ETFs at a 0.26% expense ratio.
“AVGV looks for large-, mid- and small-cap companies with attractive pricing in U.S. and non-U.S. markets, including emerging markets,” Repetto says. “AVGV is structured as an ETF investing in other Avantis ETFs, which allows it to distribute foreign tax credits despite non-U.S. allocations being less than 50%, an extra tax advantage for this global value strategy.”
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7 Best Value ETFs to Buy and Hold originally appeared on usnews.com
Update 09/18/23: This story was previously published at an earlier date and has been updated with new information.
