Growth-orientated funds with high concentrations in top tech stocks have been on a tear. However, some investors may be looking to deploy money into less volatile investment choices. Exchange-traded funds (ETFs) can be good products if you want to invest in a certain category of stocks but don't know where to start in terms of picking individual companies.
The portfolio of the Vanguard Value ETF (VTV 0.18%) includes a variety of industry-leading companies from sectors of the market that tend to trade at lower valuations -- like financials, energy, industrials, and consumer discretionary. Two other ETFs in this category to consider are the Energy Select Sector SPDR Fund (XLE 0.35%) and the SPDR Portfolio S&P 500 Value ETF (SPYV 0.22%).
Three Motley Fool contributors offer their takes on what makes all three ETFs worth buying now.
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Exposure to industries from AI to energy
Scott Levine (Vanguard Value ETF): Combing the market for quality stocks trading at a discount isn't a task investors can accomplish in a few minutes. That doesn't mean, though, that those who are pressed for time can't gain exposure to excellent value stocks. The portfolio of the Vanguard Value ETF, for example, includes attractively priced stocks from a broad range of industries.
While the Vanguard Value ETF is loaded with familiar names, its top 10 holdings are a veritable who's who of industry-leading companies. The financial sector is well-represented. For example, Berkshire Hathaway is the fund's largest holding, and its stock trades at 9.5 times trailing earnings, a discount to both its five-year average of 12.2 and the S&P 500's current P/E of 28.3. Top bank JPMorgan Chase stands in as its third-largest holding.
Oil supermajors ExxonMobil and Chevron are the largest energy holdings in the ETF, as it fifth- and 10th-largest positions, respectively.
Those who might be fretful about the idea that they'd have to sacrifice growth opportunities in order to invest in this ETF should think again. Weighing in with a position equal to 3% of the ETF's holdings, Broadcom is a leading artificial intelligence (AI) stock that offers the potential for growth. And IBM, at 0.9% of the ETF's holdings, provides additional AI exposure.
The Vanguard Value ETF makes quarterly distributions. Currently, its trailing 12-month yield is 2.4%, which more than covers its low 0.04% expense ratio.
A bet on the U.S. oil and natural gas industry
Daniel Foelber (Energy Select Sector SPDR Fund): The Vanguard Value ETF has many redeeming qualities -- its inexpensive valuation and decent yield are certainly reasons to consider it. But the energy sector today is simply too cheap to ignore, and the Energy Select Sector SPDR Fund is the most straightforward way to capture that sector's income and value opportunities.
Despite hovering around an all-time high, the fund has a low price-to-earnings ratio of 9 and a whopping 3.5% yield. Since the fund is modeled after the Energy Select Sector Index, it holds top U.S.-based energy companies. With just 23 holdings, the fund is fairly concentrated.
About 39% of the fund's assets are in ExxonMobil and Chevron shares. Just shy of 28% is in exploration and production companies like ConocoPhillips and Occidental Petroleum. The rest of the fund is a mix between oilfield services companies, refining and marketing companies, and pipeline and infrastructure companies.
Although the fund looks concentrated at first glance, it is surprisingly balanced between those five categories. Midstream companies tend to pay high dividends, which boost the fund's overall yield without having too much invested in arguably the lowest-growth portion of the oil and natural gas value chain.
In sum, the Energy Select Sector SPDR Fund does an excellent job of unlocking growth, value, and income from the entire energy sector -- not just the upstream portion. It is a great starting point if you are looking for baseline diversification.
And with an expense ratio of just 0.09%, investors only incur $9 in annual fees for every $10,000 invested.
Sustained outperformance
Lee Samaha (SPDR Portfolio S&P 500 Value ETF): This value-oriented ETF has outperformed its comparable Vanguard Value ETF on a 10-year, five-year, three-year, and one-year basis, both with and without including dividends. That's something for investors to consider when comparing its current 1.7% dividend yield with the Vanguard Value ETF's current yield of 2.4%.
Both ETFs follow a passive investing strategy intended to track an index. The Vanguard tracks the CRSP US Large Cap Value Index while the SPDR ETF aims to deliver returns that "correspond generally to the total return performance of the S&P 500 Value Index" according to the ETF's literature.
The two ETFs have the same low expense ratio of 0.04% and follow indexes that use classical value criteria such as book value, earnings, and sales multiples to determine what constitutes a value stock. However, there is a manifest difference in their diversification -- the SPDR ETF holds more than 442 stocks compared to just 350 in the Vanguard ETF.
This suggests the Vanguard ETF may be more influenced by the performances of megacap value stocks. For example, the Vanguard fund's top 10 holdings constitute 22.6% of the portfolio compared to only 19.8% for the SPDR ETF. As such, the SPDR might be capturing more of the performance of relatively "smaller" large-cap stocks that could have better growth profiles than the megacaps.
While there's no guarantee the SPDR ETF will continue to outperform, it offers an interesting contrast with the Vanguard ETF and another option for investors.