Introduction
Value investing is a time-tested strategy that focuses on buying undervalued stocks based on fundamental analysis. While individual stock selection requires deep research, value investing ETFs (Exchange-Traded Funds) provide a diversified way to gain exposure to undervalued companies. These funds track indices that focus on stocks with strong value characteristics—low price-to-earnings (P/E) ratios, high dividend yields, and strong fundamentals.
In this article, I will analyze the best value investing ETFs in the U.S. market, comparing them based on performance, expense ratios, sector exposure, and historical returns. Additionally, I will illustrate calculations to demonstrate how these ETFs fit into a value investor’s portfolio.
Why Choose Value Investing ETFs?
ETFs offer several advantages over individual stock selection:
- Diversification: Reduces the risk of investing in a single undervalued company.
- Lower Costs: Many ETFs have expense ratios below 0.1%.
- Automatic Rebalancing: They adjust holdings based on changing market conditions.
- Passive Investment: Ideal for long-term investors who prefer a hands-off approach.
Key Metrics for Evaluating Value ETFs
Before diving into specific funds, let’s look at key valuation metrics used in value investing:
- Price-to-Earnings (P/E) Ratio: Measures the price investors pay per dollar of earnings.
Price-to-Book (P/B) Ratio: Compares a company’s market value to its book value.
P/B = \frac{\text{Market Capitalization}}{\text{Book Value of Equity}}Dividend Yield: Measures how much a company pays in dividends relative to its stock price.
\text{Dividend Yield} = \frac{\text{Annual Dividend per Share}}{\text{Stock Price per Share}} \times 100Expense Ratio: Represents the annual fund management fee as a percentage of assets.
Now, let’s compare some of the top value investing ETFs.
Best Value Investing ETFs
1. Vanguard Value ETF (VTV)
- Expense Ratio: 0.04%
- Benchmark Index: CRSP U.S. Large Cap Value Index
- Top Holdings: Berkshire Hathaway, JPMorgan Chase, Johnson & Johnson
- Dividend Yield: 2.2%
- 5-Year Annualized Return: 13.3%
- Fund Size: $100+ Billion
2. iShares Russell 1000 Value ETF (IWD)
- Expense Ratio: 0.19%
- Benchmark Index: Russell 1000 Value Index
- Top Holdings: ExxonMobil, Procter & Gamble, JPMorgan Chase
- Dividend Yield: 1.8%
- 5-Year Annualized Return: 11.7%
- Fund Size: $50+ Billion
3. Vanguard Small-Cap Value ETF (VBR)
- Expense Ratio: 0.07%
- Benchmark Index: CRSP U.S. Small Cap Value Index
- Top Holdings: Smurfit WestRock, First Citizen BancShares
- Dividend Yield: 1.9%
- 5-Year Annualized Return: 12.4%
- Fund Size: $30+ Billion
4. Pacer US Cash Cows 100 ETF (COWZ)
- Expense Ratio: 0.49%
- Benchmark Index: Free Cash Flow Yield Factor Index
- Top Holdings: Companies with high free cash flow
- Dividend Yield: Varies
- 5-Year Annualized Return: 15.0%
- Fund Size: $15+ Billion
Performance Comparison Table
| ETF | Expense Ratio | Dividend Yield | 5-Year Return | Fund Size |
|---|---|---|---|---|
| VTV | 0.04% | 2.2% | 13.3% | $100B+ |
| IWD | 0.19% | 1.8% | 11.7% | $50B+ |
| VBR | 0.07% | 1.9% | 12.4% | $30B+ |
| COWZ | 0.49% | Varies | 15.0% | $15B+ |
Example: Calculating Investment Returns
Let’s assume an investor put $10,000 into VTV five years ago. Using the annualized return formula:
\text{Final Value} = \text{Initial Investment} \times (1 + r)^twhere:
- r = 13.3% or 0.133 (VTV’s 5-year return)
- t = 5 years
After five years, the initial investment would have grown to $18,560.
Historical Performance of Value vs. Growth Investing
Historically, value stocks have outperformed growth stocks in periods of high inflation and rising interest rates. The chart below shows average annual returns over different market cycles.
| Period | Value Stocks | Growth Stocks |
|---|---|---|
| 2000-2010 | 4.5% | 2.8% |
| 2010-2020 | 9.2% | 14.5% |
| 2020-Present | 10.1% | 8.7% |
Conclusion
Value investing ETFs provide a great way to gain exposure to fundamentally strong stocks at a lower cost. The Vanguard Value ETF (VTV) and iShares Russell 1000 Value ETF (IWD) are excellent choices for large-cap exposure, while Vanguard Small-Cap Value ETF (VBR) and Pacer US Cash Cows 100 ETF (COWZ) cater to investors looking for high free cash flow companies.
