VTV: A solid value ETF, but you can do better (NYSEARCA: VTV)

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(This article was co-produced with Hoya Capital Real Estate.)

Recently, I introduced readers to the Reliable Retirement ETF Portfolio.

In this article, I selected a few themes that guided my ultimate ETF selections, as well as the weightings I assigned. I have summarized one of these themes as follows.

A bias towards value stocks in the United States – Recently, a relatively small subset of US growth stocks have significantly outperformed virtually all other asset classes. Vanguard’s view agrees with other analyzes that value stocks may offer a better risk/reward profile going forward.

In this excerpt, I referred to the “Vanguard perspective”. Here, from Vanguard’s 2022 Market and Economic Outlook, is a key chart that influenced that view.

Vanguard – Asset Class Ratings

Vanguard Advisors

In the boxes highlighted in red, please note the US growth and US value asset classes. As can be seen, Vanguard presents both US growth and US large caps as stretched, while US value takes its place in the fairly valued section of the overall spectrum.

  • NOTE: As a quick diversion, Vanguard shows that the developed ex-US markets are even more fairly priced. But that has already been the subject of another of my recent articles.

If you believe the concept that after several years of outperforming US growth stocks, it may be safer to stick with value stocks for the foreseeable future, this article is for you.

I’ll start by reviewing Vanguard Value ETF (NYSEARCA: VTV). During the process, I will present the strengths of this ETF, the reasons why you might select it for inclusion in your portfolio.

At the same time, after doing a little more thorough examination, I will explain why I think there may be better options. In the last part of the article, I will very briefly look at two alternatives that might deserve your attention.

Vanguard Value ETF – Digging In

Simply put, VTV is a foundation of the ETF industry. With an inception date of 01/26/2004, it ranks among the top 150 ETFs in terms of longevity. With an AUM hovering around $92 billion, it currently ranks 8th among ETFs in the market. Its expense ratio is a miserly 0.04% and its trade spread at a tiny 0.01%.

The fund uses an index investing approach designed to track the performance of the CRSP US Large Cap Value Index, a broadly diversified index comprised primarily of value stocks of large US companies.

It should be noted that some stocks introduced into the portfolio probably deserve their lower valuations. In many cases, it is simply because these companies are in saturated sectors and the opportunities for growth are limited. In other cases, since it is a broad index, it will also sweep at least some companies whose fundamentals may be weak. At the same time, the fund is market capitalization weighted, which means that the most favored companies in the market will tend to have predominant weightings. With around 350 holdings, the effect of these weaker stocks will be somewhat muted.

As can be noted in the commentary to the previous paragraph, this is indeed a index funds. Although Vanguard is vague about the specific methodology in its published materials, the index buffers severely limit turnover, making this ETF extremely efficient. It seems that one of the reasons is that a measure of flexibility, or elasticity, is built into the index. For example, a comparative analysis against Vanguard Growth Index Fund (NYSEARCA: VUG) reveals an overlap of about 3%, meaning that at least a small subset of growth is present in the fund.

So how does all of the above play out in the fund? I love the layout of Seeking Alpha’s homepage for the various ETFs. This is what a key section looks like for VTV.

Holdings breakdown, top 10 holdings and dividend information

Alpha Search – VTV Landing Page

In search of the alpha

Starting with the holding distribution, we can clearly see VTV’s defensive bias. Using my calculator, I quickly determined that 65.76% of the fund is made up of financials, healthcare, industrials and consumer defensive. As a quick reference, VUG, VTV’s “growth” counterpart, only has a 19.40% allocation to these 4 sectors, with technology and consumer cyclicals alone accounting for over 60% of that. funds.

Moving on to the Top 10 holdings, we can see this defensive theme more clearly. At least 5 of these holdings belong to the healthcare sector, as well as 2 of the predominant financial entities in the United States.

Regarding the last section of the chart, Dividends, we can see how it plays out. Currently, VTV offers a strong TTM dividend yield of 2.11%. As another point of reference, in VUG this number is 0.51%.

In summary, then, if one is looking for perhaps as strong an ETF as one could hope to place a fully indexed bet on the US value sector with, VTV is a wonderful choice.

In the title of this article, however, I hinted at the idea that, at least in this author’s humble opinion, you might be able to choose from better options. Like what, you might ask? Let’s just spend some time looking at that in the next section.

DGRO & SCHD – Two alternatives to consider

In previous articles I have reviewed iShares Core Dividend Growth ETF (NYSEARCA: DGRO) and Schwab US Dividend Equity ETF (NYSEARCA: SCHD). As I undertook my review of VTV, I spent some time comparing it to these two ETFs as benchmarks.

What prompted me to watch this? You may remember this little excerpt from my description of the index used by VTV.

It should be noted that some stocks introduced into the portfolio probably deserve their lower valuations. In many cases, it is simply because these companies are in saturated sectors and the opportunities for growth are limited. In other cases, since it is a broad index, it will also sweep away at least some companies whose fundamentals may be weak. (Mine in italics)

Could it be that ETFs whose criteria rule out some of these weaker companies outperform as a result? It would seem that the answer is yes.

Before going any further, a caveat. Admittedly, this is not a perfect comparison. DGRO and SCHD are slightly different from VTV. We will briefly dive into these differences.

At the same time, there are also conceptual similarities between ETFs. DGRO will be a little closer in some respects, SCHD in others. Therefore, if you choose one of them as an alternative to VTV, you might lean slightly differently even between the two options.

Here, from Portfolio Visualizer, is a backtest for your consideration. It covers the period from January 2015 to December 2021, i.e. 7 full years.

Performance Comparison of VTV, DGRO, SCHD

Comparative performance – VTV, DGRO, SCHD

PortfolioVisualizer.com

As can be seen, DGRO and SCHD offered superior returns. To go further, this was the case both on a absolute, as well as a risk adjusted based. This is reflected in the relative ratios of Sharpe and Sortino. Additionally, please note that both ETFs held up slightly better than VTV during the COVID-related stock market crash of March 2020.

To close this section, let me share a tool that can help you make some nice straddle comparisons on these ETFs (and others). The site is linked at the bottom of the graphic.

Portfolio Overlap Analysis - VTV vs DGRO

Portfolio Overlap Analysis – VTV vs DGRO

etfrc.com

I did an overlap analysis of VTV against DGRO and SCHD. I decided to present the VTV/DGRO comparison because the number of holdings is quite similar in the two funds; 351 in VTV against 418 in DGRO. In this case, there is a significant overlap between VTV and DGRO. When weighted by market capitalization, there is a 56% overlap between the two ETFs.

In the case of the Top 5 Overlapping Companies (top pane), you will notice that DGRO has a slightly higher concentration. In the overweight/underweight breakdown (the bottom two panes) you can perhaps see where DGRO is getting its outperformance.

But here’s the interesting thing. Although it only includes a little more growth potential, DGRO has a lower standard deviation, as well as better drawdown numbers.

In fact, I have a suspicion. I suspect that the deeper you dig into all the comparisons I present above, the more time you are likely to spend deciding if you want to go with DGRO or SCHD, instead of considering VTV.

Summary and conclusion

As we have discussed, VTV can rightfully be considered the bedrock of the ETF industry. With its 0.04% expense ratio, massive assets under management and 17 years of experience, it’s a solid choice for investors looking for a large-cap value ETF that tracks faithfully its index and, therefore, has an extremely low turnover rate.

At the same time, even in the current environment, where growth stocks may underperform for a while, it seems to me that you might be able to do a little better. Targeted ETFs such as DGRO and SCHD, with their refined selection and screening criteria, have historically offered a better risk/reward ratio.

What do you think? I’d love to hear your views in the comments section below.

As always, until next time, I wish you . . .

Good investment!!

Working group analyzing the reports

SeanShot/E+ via Getty Images

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