7 Best Value ETFs to Buy and Hold

Intuitively, most investors understand that they can make more over the long term from stocks than from bonds.

It’s straightforward — you’re taking on more risk by owning equity in a company versus lending it money through bonds, and to make that risk worthwhile, you must be compensated with higher returns.

But did you know this relationship is a central principle in finance? It’s captured by the capital asset pricing model (CAPM), which quantifies the market risk premium — the difference between the expected return of the stock market and the risk-free rate of Treasury bills.

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CAPM provides a framework for why equities should outperform bonds over time. However, this isn’t where the story ends.

Two University of Chicago professors, Eugene Fama and Kenneth French, expanded on CAPM with their groundbreaking Fama-French Three-Factor Model. This model retained CAPM’s market risk premium but introduced two additional factors that drive long-term equity returns: size and value.

The first, size, highlighted how companies with smaller market capitalizations tend to outperform larger ones over the long run. But the second and arguably most influential factor for investors was value. This measures the excess return of companies with high book-to-market value ratios — those trading at valuations that are systematically undervalued relative to their intrinsic worth.

“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.”

This factor helped explain the long-term outperformance of legendary investors like Warren Buffett, whose success stemmed in part from owning undervalued, high-quality companies for the long haul, along with the use of leverage.

“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.”

For retail investors, one of the biggest benefits of this discovery has been the proliferation of value-focused exchange-traded funds (ETFs). These funds target the value factor, either through objective index tracking or proprietary, rules-based strategies.

Here are seven of the best value ETFs to buy and hold in 2024:

ETF Expense ratio
Vanguard Value ETF (ticker: VTV) 0.04%
WisdomTree U.S. Value Fund (WTV) 0.12%
Invesco S&P 500 Pure Value ETF (RPV) 0.35%
Dimensional U.S. Marketwide Value ETF (DFUV) 0.21%
Dimensional U.S. Targeted Value ETF (DFAT) 0.28%
Avantis U.S. Small Cap Value ETF (AVUV) 0.25%
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.” For this role, Vanguard offers VTV at a 0.04% expense ratio. For a $10,000 investment, this works out to just $4 in annual fees.

VTV tracks the CRSP U.S. Large Cap Value Index, a broad benchmark of 338 holdings with an average price-to-book ratio of 2.8 and price-to-earnings ratio of 20. Notable top holdings include blue-chip names like Berkshire Hathaway Inc. (BRK.B), JPMorgan Chase & Co. (JPM), Exxon Mobil Corp. (XOM), Johnson & Johnson (JNJ), UnitedHealth Group Inc. (UNH) and Procter & Gamble Co. (PG).

WisdomTree U.S. Value Fund (WTV)

“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.” In contrast, an ETF like WTV is able to seamlessly deploy sophisticated screening criteria all in a single ticker.

This ETF screens value stocks based on shareholder yield, a metric that evaluates both dividends and share buybacks. It is one of the few ETFs to earn a five-star Morningstar rating. This indicates that WTV has historically outperformed the majority of funds in the “mid-cap value” peer category on a risk-adjusted basis. WTV charges a 0.12% expense ratio, which is three times that of VTV, but still affordable.

Invesco S&P 500 Pure Value ETF (RPV)

“RPV is an enhancement to S&P’s style methodology aimed at providing more targeted exposure to value stocks in the S&P 500 Index,” says Nick Kalivas, head of factor and core equity ETF product strategy at Invesco. “RPV uses the same stock screening process as the S&P 500 Value Index, but then differs by only holding stocks with the highest value scores, creating deeper value exposure.”

The result is a portfolio of 112 holdings screened based on three value score factors: book-value-to-price ratio, earnings-to-price ratio and sales-to-price ratio. “Furthermore, stocks in the portfolio are weighted by their value score, not market cap, and there is no overlap with growth stocks like the first-generation S&P 500 style indices,” Kalivas notes. The ETF charges a 0.35% expense ratio.

Dimensional U.S. Marketwide Value ETF (DFUV)

“Dimensional’s value strategies use reliable information in prices to target higher expected returns within value stocks,” Lee explains. “A daily flexible process allows us to maintain consistent emphasis on higher-expected-return securities through time, while still being competitively priced within the lowest quartile of Morningstar category peers.” For broad value exposure, Dimensional offers DFUV.

This actively managed ETF sports a very tax-efficient 4% annual turnover rate and a reasonable 0.21% expense ratio. Dimensional screens stocks to overweight those with a smaller market cap, price-to-book value and profitability. The mutual fund version of this ETF has outperformed its benchmark, the Russell 3000 value index, since its inception in December 1998 and over the trailing 10-year period.

[5 ETFs That Outperform the S&P 500]

Dimensional U.S. Targeted Value ETF (DFAT)

“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,” Lee says. For more concentrated value and size exposure, the firm offers DFAT. Compared to DFUV, this ETF is more aggressive.

Unlike DFUV, DFAT is not meant to provide broad market value exposure. This ETF is benchmarked to the Russell 2000 Value Index, which puts it in the “small-cap value” category. However, it still employs many of the same fundamental screeners for size, value and profitability used by DFUV. Historically, the mutual fund version of DFAT has outperformed its benchmark since its inception in December 1998.

Avantis U.S. Small Cap Value ETF (AVUV)

“Small-cap companies trading at attractive prices and with good profitability are trading at very appealing relative valuations looking back the last 20-plus years,” says Daniel Ong, senior portfolio manager at Avantis Investors. “These companies present a great opportunity versus other parts of the market that are trading at rich multiples.” For small-cap value exposure, Avantis offers AVUV.

This actively managed ETF employs Avantis Investors’ proprietary screeners for size, value and profitability. It is broadly diversified, with 750 holdings, and also well capitalized, with over $16 billion in assets under management. Over the past five years, AVUV has returned an annualized 14.1%, nearly double that of the Russell 2000 Value index’s 7.3%. The ETF charges a 0.25% expense ratio.

Avantis All Equity Markets Value ETF (AVGV)

Investors can easily add AVUV to a broad-market ETF to introduce a size and value tilt to their portfolio. However, this approach requires manual rebalancing. For a more hands-off approach, consider AVGV. This ETF uses a “fund of funds” structure to hold six other Avantis ETFs. It is globally diversified across U.S., international developed and emerging markets with a small-cap value tilt.

“Well-established research has shown that companies with a combination of strong profitability and attractive valuations can deliver premium performance,” says Matthew Dubin, portfolio manager at Avantis Investors. “AVGV’s ETF structure allows for efficient implementation of this research to help investors improve their asset allocations at a competitive expense ratio of 0.26%.”

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7 Best Value ETFs to Buy and Hold originally appeared on usnews.com

Update 01/28/25: This story was published at an earlier date and has been updated with new information.

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