The S&P 500 (^GSPC +0.02%) has historically been a fantastic way to compound wealth -- generating annualized total returns of 9% to 10%. The proliferation of low-cost index funds and exchange-traded funds (ETFs) has made it easier than ever to invest in the S&P 500 without racking up high fees.

The Vanguard S&P 500 ETF (VOO -0.01%) -- one of the largest S&P 500 index funds by net assets -- has an expense ratio of just 0.03% -- or 3 cents for every $100 invested. When I first began investing, it was normal to see flat fees per stock trade of around $5 to $10. So fees and expense ratios are no longer a major drag on returns for investors who regularly pour their savings into equities.

One issue with buying the S&P 500 is that it doesn't have a high yield. Today's top S&P 500 companies are growth stocks that have yields well below 1% or don't pay dividends at all -- a stark contrast to the days when the most valuable companies were oil and gas giants, industrials, or consumer staples behemoths with high yields.

As a result, the yield of the S&P 500 has fallen to just 1.2%. What's more, the valuation of the S&P 500 has gotten more expensive as stock prices have outpaced earnings growth.

Here's why investors looking to use passive income as a key way to achieve their financial goals may want to consider buying the Vanguard Value ETF (VTV +0.32%) over the Vanguard S&P 500 ETF.

Image source: Getty Images.

A lower yield at a better valuation

The Vanguard Value ETF sports an expense ratio of 0.04%, so it has just one cent more in annual fees per $100 invested than the Vanguard S&P 500 ETF. It also offers a full percentage point higher in 30-day SEC yield at 2.2% compared to 1.2% for the S&P 500 ETF.

In addition to having a higher yield, the Value ETF sports a 19.6 price-to-earnings (P/E) ratio (as of June 30) and holds 335 stocks compared to a 27.2 P/E ratio (also as of June 30) and 505 holdings for the S&P 500 ETF.

The Value ETF's higher yield and significantly lower valuation may appeal to investors looking to avoid paying a premium for the top stocks that are leading the S&P 500.

A different cast of characters

The Value ETF's higher yield and lower valuation result from its composition.

Data source: Vanguard.

Aside from Berkshire Hathaway and JPMorgan Chase, there are no other companies that overlap the top 10 holdings in the Value ETF and S&P 500 ETF.

You'll also notice that the S&P 500 is much more top-heavy -- meaning that just a handful of names can move the index. Whereas the Value ETF is more balanced and not as dominated by just 10 companies.

Far more than a passive income vehicle

Over the last decade, the Value ETF has gone up 111.5% and has a total return of 173.5%. Meaning that capital gains have made up a much higher percentage of the total return than dividend income. The investment thesis centers around the companies it holds rather than being all about yield, a stark contrast to ETFs that prioritize passive income over upside potential.

The JP Morgan Nasdaq Equity Premium ETF (JEPQ -0.38%) sells covered call options on the Nasdaq-100 as a way to generate income -- which provides a sizable stream of monthly payouts while capping the upside potential of the Nasdaq-100 moving higher. The fund sports an 11.2% 30-day SEC yield (as of June 30), so it could be a great way for investors who are primarily focused on passive income. However, the Value ETF offers a way to get a higher yield than the S&P 500 without having any cap on upside potential.

The Schwab U.S. Dividend Equity ETF (SCHD +0.39%) doesn't use call options to achieve its high 3.9% yield. But many of its holdings are arguably lesser quality companies than what you'll find in the Value ETF.

The Vanguard Value ETF remains a top fund to buy now

The Value ETF is a good buy if you already own many of the top growth stocks in the S&P 500 and are looking to diversify your portfolio into different companies and boost your passive income.

It's also a good option for investors who want to participate in the broader market and collect more passive income than the S&P 500.

While there are plenty of ETFs that offer higher yields than the Value ETF, I would argue that the quality of companies in the ETF makes it one of the best ways to consistently collect more passive income than the index.