Value investing has been a cornerstone of financial strategy since Benjamin Graham and Warren Buffett popularized the concept. But in today’s fast-moving markets, does the same logic apply to Value ETFs? I’ll explore whether these funds are a smart addition to your portfolio, using historical data, performance metrics, and real-world examples.
What Are Value ETFs?
Value ETFs are exchange-traded funds that focus on stocks deemed undervalued based on fundamental metrics like:
- Price-to-Earnings (P/E) Ratio
- Price-to-Book (P/B) Ratio
- Dividend Yield
- Free Cash Flow
These ETFs screen for companies trading below their intrinsic value, betting on a future price correction. Popular examples include:
- Vanguard Value ETF (VTV)
- iShares Russell 1000 Value ETF (IWD)
- SPDR S&P 500 Value ETF (SPYV)
How Value ETFs Differ from Growth ETFs
| Factor | Value ETFs | Growth ETFs |
|---|---|---|
| Focus | Undervalued stocks | High-earning potential stocks |
| Valuation | Low P/E, P/B ratios | High P/E, P/B ratios |
| Dividends | Often higher dividend payouts | Lower or no dividends |
| Volatility | Generally less volatile | More volatile |
Historical Performance of Value ETFs
Long-Term Trends
Historically, value stocks outperformed growth stocks—until the last decade. From 1926 to 2020, value stocks delivered an annualized return of 12.1%, compared to growth stocks’ 9.6% (source: Fama-French Three-Factor Model).
However, post-2008, growth stocks (especially tech) dominated. The Russell 1000 Growth Index crushed the Russell 1000 Value Index by a wide margin:
| Period | Russell 1000 Growth (%) | Russell 1000 Value (%) |
|---|---|---|
| 2010-2020 | 16.5 | 10.2 |
| 2020-2023 | 18.3 | 8.7 |
Why Value Underperformed Recently
- Low-Interest Rates – Growth stocks (especially tech) benefited from cheap borrowing.
- Tech Boom – Companies like Apple and Amazon saw exponential growth.
- Market Sentiment – Investors chased high-momentum stocks over “cheap” ones.
The Case for Value ETFs in 2024
1. Rising Interest Rates Could Favor Value
Historically, value stocks perform better in high-rate environments. The logic?
- Growth stocks rely on future earnings, which get discounted more when rates rise.
- Value stocks often generate steady cash flows, making them resilient.
The Fed’s rate hikes since 2022 have already shown early signs of a value resurgence.
2. Valuation Gap Between Growth and Value
As of 2024, the P/E ratio of the S&P 500 Growth Index is 28.5, while the Value Index sits at 16.2. This is a 42% discount—one of the widest in history.
\text{Value Discount} = \frac{\text{Growth P/E} - \text{Value P/E}}{\text{Growth P/E}} \times 100 = \frac{28.5 - 16.2}{28.5} \times 100 \approx 42\%If mean reversion occurs, value ETFs could see significant upside.
3. Dividend Income Advantage
Many value ETFs hold dividend-paying stocks, providing passive income. For example:
- VTV (Vanguard Value ETF) has a dividend yield of 2.5%.
- SPYV (SPDR S&P 500 Value ETF) yields 2.3%.
Compare this to QQQ (Nasdaq-100 ETF), which yields just 0.6%.
Risks of Investing in Value ETFs
1. Value Traps
Some “cheap” stocks stay cheap—or get cheaper. A company with a low P/E ratio might be struggling, not undervalued.
Example: General Electric (GE) was once a value pick but declined due to mismanagement.
2. Prolonged Underperformance
If growth stocks keep dominating, value ETFs may lag. The lost decade (2010-2020) proves this risk.
3. Sector Concentration
Value ETFs are often heavy in financials, energy, and industrials. If these sectors slump, the ETF suffers.
How to Invest in Value ETFs Wisely
1. Diversify Across Strategies
Instead of just one ETF, consider:
- Blend ETFs (mix of value and growth)
- Dividend ETFs (consistent income)
- Factor ETFs (combining value with quality or momentum)
2. Pair with Growth Exposure
A 60% Growth / 40% Value split balances risk and reward.
3. Look for Low Fees
Expense ratios matter. VTV (0.04%) is cheaper than IWD (0.19%), saving you money long-term.
Final Verdict: Are Value ETFs Worth It?
Yes, but with caveats.
- If you seek stability and dividends, value ETFs are a strong choice.
- If you believe in mean reversion, now may be a good entry point.
- If you prefer high growth, you might underweight value.
I recommend a balanced approach—using value ETFs as part of a diversified portfolio rather than an all-in bet. The market cycles, and when the pendulum swings back to value, you’ll be positioned to benefit.
Would I go all-in on value ETFs today? No. But ignoring them completely would also be a mistake. The key is measured exposure—just enough to hedge against growth volatility while still capturing upside.
