The art of value investing is often underappreciated. Pioneered by Benjamin Graham and evolved by Warren Buffett (Trades, Portfolio), value investing seeks companies with promising earnings and low-risk premiums in an attempt to unlock hidden value.
Despite the impressive track record of value investing, there are occasions when investors make a bad judgment call and label a stock a value stock when it is actually overvalued, or when the business is in permanent decline. However, one way to reduce the risk of this, especially for investors who don't have that much time to research individual stocks, is to utilize exchange-traded funds, or ETFs. ETFs remove much of the risk that comes with stock-picking as they provide investors with an opportunity to invest in a diversified portfolio that is either actively managed by professionals or follows strict rules. Diversification may limit the gains from the biggest winners, but it also reduces overall downside risk.
However, with a long list of value-based ETFs to choose from, investors are still left with a fair bit of homework to do. Thus, I decided to dig deep into value ETFs to find my three favorites; let's take a look.
The Vanguard Value Index Fund ETF
The Vanguard Value ETF (VTV, Financial) was formed in 1992 and invests in large-cap value stocks within the United States. The fund has a beta coefficient of merely 0.93, meaning that it has achieved its lucrative returns at minimal risk.
The fund hosts over 300 stocks and is primarily invested in the health care and financial sectors to provide it with a balanced exposure to cyclical swings within the economy. Some of the fund's primary constituents include the following:
Source: Vanguard
Perhaps one of the most salient features of the ETF is its return ratios. For example, the ETF has an average earnings growth rate of 13.3% and a dividend yield of 2.62%. To contextualize the significance of these numbers, the S&P 500 has an earnings per share growth rate of approximately 11.99% over the same period of time and a dividend yield of merely 1.69%.
The Avantis U.S. Small-Cap Value ETF
In the late 1990s, two financial academics named Eugene Fama and Kenneth French discovered that risk-seeking investors tend to invest in small-cap value securities when they believe stocks will outperform the bond market. Therefore, they hypothesized that small-cap value stocks might outperform other stock segments over long holding periods.
The Avantis U.S. Small-Cap Value ETF (AVUV, Financial) allows investors to invest in Fama and French's philosophy. The vehicle was formed in 2019 by the American Century ETF Trust and has achieved more than 50% in price returns since its inception while providing its investors with a dividend yield ranging between 0.38% to 2%.
As a style-based ETF, AVUV provides investors with cross-sector exposure, including stocks like Goodyear Tire (GT, Financial) and Louisiana-Pacific Corporation (LPX, Financial). Furthermore, the fund's exposure usually focuses on stocks with price-earnings ratios between 6 and 14.6, conveying that it emphasizes value over everything else.
Source: Avantis
The iShares MSCI Intl Value Factor ETF
A fully diversified investment portfolio typically has geographic diversification in addition to its style and sector exposure. Therefore, an international value ETF such as the iShares MSCH Intl Value Factor ETF (IVLU, Financial) provides an excellent option to investors seeking optimal diversification in my opinion.
With exposure to names like British American Tobacco (BTI, Financial) and Shell (SHEL, Financial), the ETF clearly factors quality into its investment thesis. Furthermore, the fund's price-book ratio of approximately 0.94 signals value in abundance, especially as many of its holdings are mature companies, which are generally accepted to carry higher justified price multiples in my view.
Source: BlackRock (iShares)
Another feature of the ETF to admire is its 3.33% dividend yield, which has oscillated in a range between 1.81% and 4.92% in the past 10 years. Collectively, the ETF's risk-return attribution displays balanced income versus capital gains potential.
Noteworthy risks
Although the concept of value investing has a commendable track record, it does not protect an investor against broad-based market drawdowns. Therefore, by considering the uncertain economic times the world is in, investors first need to ask themselves whether additional exposure to the equity market is what they want at the moment. While value investing as a whole professes to eschew market timing, investors may find themselves in need of liquidity if the economy sours, which could potentially necessitate selling equities at a loss for those over-invested in stocks.
Concluding thoughts
The modern investment sphere provides a universe of different investment products that allow investors to gain exposure to all sorts of investment styles. One such style is value investing, which has a track record of often providing investors with superior returns in the long run. After researching value ETFs, some of my personal favorites are the Vanguard Value ETF, the Avantis U.S. Small-Cap Value ETF and the iShares Intl Value Factor ETF.
