In the quest for sustained investment returns, the spotlight is shifting away from solely growth-oriented equities. Recent analyses from Vanguard indicate a potential decade-long period where U.S. value stocks, defined as companies trading below their intrinsic worth, may deliver superior performance compared to their growth counterparts. This projection prompts a closer examination of investment vehicles designed to capture this potential market trend.
Two distinct Vanguard exchange-traded funds (ETFs) provide avenues for investors to engage with value stocks: the Vanguard Small-Cap Value ETF (VBR) and the Vanguard U.S. Value Factor ETF (VFVA). The VBR is a passively managed, cost-efficient fund that mirrors an index composed of smaller companies, emphasizing the small-cap segment of the value market. Conversely, the VFVA operates as an actively managed fund, where seasoned investment professionals curate a portfolio of undervalued stocks across various market capitalizations for a slightly elevated fee. Both ETFs have demonstrated robust performance over the past year, surpassing the returns of both the S&P 500 and the technology-heavy Nasdaq-100 indexes.
Delving deeper into the Vanguard Small-Cap Value ETF (VBR), its strategy aligns with Vanguard's forecast for small-cap stocks to outperform large-cap stocks. Established in January 2004, VBR boasts a diverse portfolio of 840 stocks. Over its 22-year history, the fund has generated an impressive average annual return of 9.51% by net asset value. More recently, its annualized returns have been approximately 27% over the last year, 16.1% over three years, and 9.2% over five years. The fund is well-diversified across sectors, with significant allocations to industrials (20.8%), financials (18.1%), consumer discretionary (14.6%), real estate (10.2%), and technology (8.5%). It maintains a low expense ratio of 0.05% and has achieved a 5.2% average annual earnings growth over the past five years, with a trailing 12-month price-to-earnings (P/E) ratio of around 18.
For investors seeking a broader exposure to value stocks beyond just small-caps and willing to accept a marginally higher fee, the Vanguard U.S. Value Factor ETF (VFVA) presents an alternative. This actively managed fund, initiated in February 2018, holds 666 stocks spanning large-, mid-, and small-cap companies. Its stock selection is based on fundamental valuation metrics such as book value to price, forward earnings to price, and operating cash flows to price. VFVA carries an expense ratio of 0.13%. Over its eight-year lifespan, VFVA has delivered annualized returns of 10.96%, with more recent performance showing average annual returns of about 16.9% over the past three years. Its portfolio includes recognizable companies such as EOG Resources, Bristol Myers Squibb, Cigna Group, Salesforce, and Intuit. This fund has exhibited a faster earnings growth rate of 7.1% over the last five years and a lower P/E ratio of 11.4 compared to VBR. Since its inception, VFVA has outperformed VBR, though both have trailed the S&P 500 index.
While Vanguard's market predictions offer compelling insights, the future performance of value stocks, growth stocks, or large-cap equities remains uncertain. However, for investors who are convinced by the potential resurgence of value stocks, both VBR and VFVA offer structured ways to participate. These ETFs provide diversified exposure to companies deemed undervalued, aligning with a strategy that seeks to capitalize on market inefficiencies. Exploring these and other value-focused ETFs could be a prudent step for those looking to position their portfolios for the next investment cycle.