Large-cap value stocks are generally defined as stocks with market capitalizations over $10 billion that trade for attractive valuations. Value stocks are generally established, dividend-paying companies that can generate reliable profits year after year. Because individual stocks can be quite volatile, an exchange-traded fund, or ETF, can be the smartest large-cap value investment for most Americans.
Why invest in large-cap value stock ETFs?
As the name implies, value stocks are generally defined to be those trading for attractive valuations relative to the market or peer group average. For example, if the average bank stock trades for 15 times earnings, a bank that trades for 13 times earnings could be considered a value investment. Admittedly, this is a loose definition that is somewhat open to interpretation. As you'll see in a minute, different "value" ETFs have somewhat different stock holdings.
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Generally speaking, value stocks tend to be established companies with steadily growing revenue and earnings. They also tend to pay dividends, which is why ETFs that invest in value stocks tend to have above-average dividends, as we'll see in a bit.
Value stocks, as a group, tend to be less volatile than stocks of fast-growing companies. However, there is still a lot of potential for volatility when buying any individual value stock. For investors who want the growth and income potential of value stocks, but don't want the inherent risks that come with choosing individual stocks, a value stock ETF could be the best way to invest.
4 top large-cap value ETFs
If you're looking to invest in large-cap value stocks, here are ETFs that track different indexes that contain companies that meet the criteria.
|
Fund Name |
Expense Ratio |
Dividend Yield |
5-Year Average Total Return |
|---|---|---|---|
|
Schwab U.S. Large-Cap Value ETF (SCHV 0.02%) |
0.04% |
3.11% |
14.2% |
|
Vanguard Value Index Fund ETF (VTV 0.03%) |
0.06% |
2.44% |
15% |
|
Vanguard High Dividend Yield Index Fund ETF (VYM +0.15%) |
0.08% |
2.94% |
14.5% |
|
PowerShares S&P 500 Low Volatility Portfolio (SPLV +0.34%) |
0.25% |
1.96% |
13.9% |
Data source: TD Ameritrade. Expense ratios and assets are current as of June 29, 2017, and returns are as of May 31, 2017.
1. Schwab U.S. Large-Cap Value ETF
With an expense ratio of just 0.04%, the Schwab U.S. Large-Cap Value ETF is the cheapest large-cap value ETF as of this writing. The fund tracks the Dow Jones U.S. Large-Cap Value Total Stock Market Index, and currently has 381 stocks in its portfolio. I mentioned that there is no set-in-stone definition of what a value stock is, but you can get a good idea by looking at each fund's holdings. As of this writing, the Schwab U.S. Large-Cap Value ETF's top five holdings are Microsoft, Johnson & Johnson, ExxonMobil, JPMorgan Chase, and Wells Fargo.
2. Vanguard Value Index Fund ETF
The Vanguard Value Index Fund ETF tracks the CRSP US Large Cap Value Index, a similar, but not identical, index to that of the Schwab fund. The fund is slightly more concentrated, with about 50 fewer stocks, and a few notable differences in the holdings. For example, Berkshire Hathaway, the conglomerate led by Warren Buffett, is considered a value stock by this index and is this fund's fourth-largest holding, while it is absent from the Schwab fund's index. The rest of the top five are the same.
3. Vanguard High Dividend Yield Index Fund ETF
This is not technically a "value index" fund. Instead, the Vanguard High Dividend Yield Index Fund ETF tracks the FTSE High Dividend Yield Index, which invests in companies with above-average dividend yields, specifically excluding REITs. The vast majority of stocks that fit this description are value stocks, and to illustrate this, consider that the fund's five largest holdings are exactly the same as those of the Schwab fund. High-dividend stocks tend to outperform their non-dividend and lower-dividend counterparts over long time periods, and tend to hold up better during recessions, which makes this fund a favorite of many value investors.
4. PowerShares S&P 500 Low Volatility Portfolio
You may have noticed from the chart that the PowerShares S&P 500 Low Volatility Portfolio ETF has the highest expense ratio of the funds listed here, although I wouldn't call it "expensive." I included it here because it takes a somewhat different approach to value investing by tracking the S&P 500 Low Volatility Index, which consists of the 100 stocks from the S&P 500 index that have had the lowest volatility over the past 12 months. Lower-volatility stocks can provide excellent downside protection in recessions and market crashes, which may be interesting to investors after the eight-year bull market we've had. Top holdings of the fund include 3M, Republic Services, Johnson & Johnson, Waste Management, and PepsiCo. And unlike the other funds on the list that can be quite "top heavy," no stock makes up more than 1.31% of this fund's total assets.
