While certain sectors and industries have performed well, no major benchmarks have posted positive returns in 2022 year to date. Clearly, the bear market bite has been felt across the market. But generally speaking, two broad trends have emerged and will likely stay with us for a while -- value has outperformed growth and large caps have outperformed mid and small caps.
Given this reality, letʻs take a look at two popular, but different, large-cap value exchange-traded funds (ETFs), the Vanguard Value ETF (VTV 0.40%) and the American Century Focused Large Cap Value ETF (FLV -0.02%). Which is the better investment?
Vanguard Value ETF
The Vanguard Value ETF tracks the performance of the CRSP U.S. Large Cap Value Index, which large-cap value stocks from within the larger CRSP U.S. Large Cap Index, a slightly larger universe than the S&P 500, with about 600 stocks. The Vanguard Value ETF holds about 349 stocks, with a median market cap of $117 billion. About 20% of the portfolio is in healthcare stocks, while 19.3% is in financials and 11% is in consumer staples.
The five largest holdings are Berkshire Hathaway, Johnson & Johnson, UnitedHealth Group, ExxonMobil, and JPMorgan Chase.
The ETF is down about 9% as of June 28 and down roughly 3% over the past year. But longer term, it has posted solid returns, up 11.4% over the past five years and 13.2% over the past 10 years, on an annualized basis. It has a dividend yield of 2.1%, and its most recent quarterly distribution was $0.83. Further, it has an average price-to-earnings (P/E) ratio of 15.9. Also, as is typical of Vanguard funds, it has a low expense ratio of 0.04%.
American Century Focused Large Cap Value ETF
The American Century Focused Large Cap Value ETF is different from the Vanguard Value ETF in several key ways. For starters, it draws from a broader universe, the Russell 1000 Value Index, so it includes both large- and mid-cap stocks. But more importantly, it is actively managed, meaning it does not passively track the performance of the Russell 1000 Value Index.
The portfolio management team employs a proprietary process that seeks out stocks that are selling at a discount to fair value. Further, it focuses on higher- quality companies that have limited downside risk, thus are less volatile. But while it draws from a broader universe, it is a far more concentrated portfolio with only 50 holdings and is actively rebalanced to include what the team sees as the best value stocks, based on its investment process.
As an actively managed ETF, the holdings are only posted quarterly, similar to a mutual fund. As of March 31, the top five holdings are Johnson & Johnson (5.5%), Medtronic (4.5%), Unilever (4.5%), Berkshire Hathaway (4%), and Verizon Communications (3.8%).
The ETF is down about 6% YTD as of June 28 and is down about 4% over the past year. This ETF has only been around since March 31, 2020, so it doesn't have the track record of the Vanguard Value ETF, or many others for that matter. That's because actively managed ETFs have only been around for a few years. But since inception, it has an average annual return of 24% through May 31. In addition, it has a dividend yield of 1.7% with a most recent quarterly distribution of $0.30. Also, it has an average P/E ratio of 16.8 and an expense ratio of 0.42%.
Which is the better buy?
Large-cap value stocks, in general, are a pretty good place to be right now as we move into a period of higher interest rates and possibly a recession. Growth stocks typically thrive in a bull market, while value stocks, which are often from large, established companies that are well-capitalized, perform better when the economy and markets slow down and coming out of recessions.
While the American Century ETF has a higher expense ratio, it has a significantly better year-to-date return. It hasn't had as long to prove itself as the Vanguard ETF, but the ability to manage the portfolio and pick stocks to limit volatility and maximize gains are likely to become more valuable as we head into an uncertain and volatile period for the market.