This year's market rally has been led by growth stocks, namely mega-cap tech stocks like Nvidia and Meta Platforms (both up over 180% year-to-date). And with the 10-year Treasury note still at 4.5%, investors may be wondering what the point of investing in dividend stocks is if they can get a quality yield from the risk-free rate.
The Vanguard Value ETF (VTV 0.13%) is one of the largest exchange-traded funds (ETFs) out there. But it is practically flat on the year, heavily underperforming the broader indices.
Here's why now is a good time to buy the ETF for investors who want dividend income and want to participate in the risks and potential reward of the stock market, instead of settling for a risk-free rate.
Uncharacteristic underperformance
The Vanguard Value ETF was down 4.6% in 2022, which sounds bad until you realize the Dow Jones Industrial Average fell 8.8%, the S&P 500 dropped nearly 20%, and the Nasdaq Composite lost a third of its value.
2023 has been a complete flip-flop, with the Vanguard Value ETF underperforming all the major indices.
If big tech and growth stocks take a huge hit like they did last year, the Vanguard Value ETF will be just fine. If the market is up big thanks to big tech, the Vanguard Value ETF may miss out on the rally. It all makes sense once you look under the hood of what is in the $139.4 billion bemouth of an ETF.
A far safer alternative than the S&P 500
The Vanguard Value ETF is similar to the S&P 500 in that it targets large-cap stocks. But the types of stocks it holds, and the sectors those companies are in, starkly contrast those of the S&P 500.
Sector |
Vanguard Value ETF |
Vanguard S&P 500 ETF (VOO 0.05%) |
---|---|---|
Financials |
19.1% |
12.7% |
Health Care |
18% |
13.2% |
Industrials |
15% |
8.3% |
Technology/Communications |
12.4% |
36.8% |
Consumer Staples |
10.9% |
6.6% |
Energy |
8.1% |
4.5% |
Utilities |
5.9% |
2.5% |
Consumer Discretionary |
5.5% |
10.6% |
Real Estate |
3% |
2.4% |
Basic Materials |
2.1% |
2.4% |
As you can see in the above table, the Vanguard Value ETF overweights financials, healthcare, industrials, consumer staples, energy, utilities, and real estate, while underweighting technology and communications and consumer discretionary.
The fund's top 10 holdings look almost nothing like the top 10 holdings of the Vanguard S&P 500 ETF. Aside from the different names, one thing you'll notice right away is how much more spread out the Vanguard Value ETF is than the S&P 500 ETF.
For example, the "Magnificent Seven" stocks, a term coined by Bank of America analyst Michael Hartnett to describe Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms, and Tesla, make up 27.8% of the Vanguard S&P 500 ETF but 0% of the Vanguard Value ETF. Meanwhile, the top 10 holdings of the Vanguard Value ETF make up just 23.2% of the fund, while the top 10 holdings of the Vanguard S&P 500 ETF make up 31.7% of the fund.
Company |
% Of Vanguard Value ETF |
Company |
% Of Vanguard S&P 500 ETF |
---|---|---|---|
Berkshire Hathaway |
3.82% |
Apple |
6.96% |
UnitedHealth Group |
3.04% |
Microsoft |
6.49% |
ExxonMobil |
2.6% |
Alphabet |
3.99% |
JPMorgan Chase |
2.48% |
Amazon |
3.19% |
Johnson & Johnson |
2.19% |
Nvidia |
2.97% |
Procter & Gamble |
2.17% |
Tesla |
1.91% |
Broadcom |
2.13% |
|
1.85% |
Merck & Co |
1.6% |
Berkshire Hathaway |
1.77% |
Chevron |
1.59% |
ExxonMobil |
1.3% |
AbbVie |
1.53% |
UnitedHealth |
1.29% |
The Vanguard Value ETF holds 342 stocks in total, fewer than 20 of which make up more than 1% of the fund's holdings. So the fund is well diversified across a variety of names with a focus on value and income.
Pros and cons of the Vanguard Value ETF
The ETF's composition allows it to have a far higher dividend yield than the S&P 500 and a far lower low price to earnings (P/E) ratio. It sports a 2.7% yield, compared to a 1.6% yield for the Vanguard S&P 500 ETF, and has just a 15.1 P/E ratio, compared to 21.2 for the S&P 500 ETF. The lower P/E is what you'll get when you load up on sectors that tend to trade at a discount to the market, like utilities, energy, and consumer staples.
To be fair, the Vanguard Value ETF should always have a below-market P/E. As we are seeing this year, the fund can underperform a strong year in the broader market if its top sectors are missing out on the rally. The ETF's highest-weighted sector, financials, is up just 2.3% on the year, while energy is down 3.9%, healthcare is down 4.8%, consumer staples are down 7%, and utilities are down 11.7%.
The last two years have seen massive sector rotations. And while you can expect the Vanguard Value ETF to underperform the S&P 500 during a bull market, the extent of this year's underperformance is uncommon. Here's a look at the total return (dividends included) of the Vanguard Value ETF compared to the S&P 500 over the last 10 years.
Investment |
2023 YTD |
2022 |
2021 |
2020 |
2019 |
2018 |
2017 |
2016 |
2015 |
2014 |
---|---|---|---|---|---|---|---|---|---|---|
Vanguard Value ETF |
2.6% |
(2.1%) |
26.5% |
2.3% |
25.7% |
(5.4%) |
17.1% |
17.1% |
(1%) |
13.2% |
S&P 500 |
20% |
(18.1%) |
28.7% |
18.4% |
31.5% |
(4.4%) |
21.8% |
12% |
1.4% |
13.7% |
As you can see in the table, the Vanguard Value ETF typically puts up a solid performance when the S&P 500 is up big. This year marks the largest underperformance over the last decade. And perhaps most importantly, the fund hasn't had a calendar year where it produced more than a negative 6% total return over the last decade.
A rare combination of diversification and yield
If you're a passive income investor, it's easy to get smitten by a high yield. But a high yield means little if the underlying stock is losing value. There are plenty of stocks that have higher yields than the Vanguard Value ETF. But the ETF offers a 2.7% yield backed by a very high quality and diversified portfolio of stocks without comprising upside exposure to the broader market. That combination could be much more valuable over the long term than getting a few more percentage points of yield.
The ETF is ideally suited for investors who are looking for stocks that trade at a discount to the market and want passive income, but also want to limit the likely downward exposure during a bear market.
Throw in the fact that the fund is massive and has a tiny 0.04% expense ratio, and there's a lot to like about the under-appreciated Vanguard Value ETF.