With $188 billion in net assets, the Vanguard Morningstar Value ETF (VTV -0.13%) is by far the largest value-oriented exchange-traded fund (ETF) in the world. And for good reason, as the ETF charges the same 0.03% expense ratio as the world's largest ETF by net assets -- the Vanguard S&P 500 ETF (VOO -0.31%). Low fees provide cost-effective exposure to leading value stocks
The ETF is a good fit for investors who want to target companies priced more for what they are earning today than for what they could earn in the future. This is why the ETF has significantly higher weights in sectors like financials, healthcare, industrials, and consumer staples than the Vanguard S&P 500 ETF.
The results have been solid too, as the Vanguard Value ETF has produced a total return (dividends plus capital gains) of 67.9% over the past three years -- and that's without key artificial intelligence (AI) stocks like Nvidia. The Vanguard Morningstar Value ETF is effective because of its simplicity.
But it has a glaring flaw. Here's a Vanguard ETF with a similar cost profile that solves this problem, and why it's a better buy in September than the Value ETF.
Image source: Getty Images.
The all-or-nothing approach
The Value ETF tracks the performance of the Morningstar U.S. Large Cap Value index, while the Vanguard Morningstar Growth ETF (VUG -0.46%) tracks the Morningstar U.S. Large Cap Growth index. These indexes divide mega-cap and large-cap stocks into two baskets, with the Growth ETF holding 147 components and the Value ETF holding 308.
There's no crossover between the two ETFs. So there are plenty of stocks in the Growth ETF that used to grow much faster than they are today. And there are former value stocks in the Value ETF that many investors would now consider growth stocks, as AI has been a game-changer for business models. For example, Micron Technology is now the second-largest holding in the Vanguard Value ETF -- behind JPMorgan Chase.
Both indexes undergo quarterly rebalancing and reconstitution periods, during which stocks can be shuffled as their investment theses change. But that process still involves an all-or-nothing approach, in which a stock like Micron would be removed from the value index and included solely in the growth index.
NYSEMKT: VTV
Key Data Points
A more flexible value stock ETF
FTSE Russell is a subsidiary of the London Stock Exchange Group, which manages the Russell 1000 index that tracks the 1,000 largest U.S.-listed companies. The index is very similar to the S&P 500, but broader, as it includes smaller large-cap and mid-cap stocks.
FTSE Russell has a semi-annual reconstitution in which it weights components by growth and value, with roughly half of the Russell 1000's market cap going into the growth index and the other half into the value index. Since growth stocks make up a far larger share of the Russell 1000 than value stocks, the index essentially pulls some of the market cap of mega cap growth stocks and adds them to the value index.
The Vanguard Russell 1000 Value ETF (VONV -0.50%) tracks the Russell 1000 Value index, while the Vanguard Russell 1000 Growth ETF (VONG +0.00%) tracks the Russell 1000 Growth index. Both ETFs charge mere 0.06% expense ratios, which is just $6 for every $10,000 invested.
The methodology of the Russell 1000 is notably different from the all-or-nothing approach of the Growth and Value ETFs. The Vanguard Russell 1000 Value ETF's largest positions are Amazon, Apple, and Microsoft because the Russell 1000 splits the market cap of these companies between the Russell 1000 Value index and the Russell 1000 Growth index.
A small portion of Meta Platforms' market capitalization is also in the Russell 1000 Value index, although most of it is still in the growth index. In other words, the Russell 1000 recognizes that these mega-cap companies make up such a large portion of the U.S. stock market and have so many moving parts that oversimplifying them as purely growth stocks is flawed.
The split weighting system makes the Vanguard Russell 1000 Value ETF a much better modern-day representation of value investing than the Vanguard Value ETF. The everyday use of Apple's products and services makes it arguably more of a consumer-staples company than a high-flying tech company. Similarly, Amazon Web Services could be considered an essential service for many enterprises -- especially as AI usage increases.
The Vanguard Russell 1000 Value ETF adjusts for how these businesses have matured into hybrids of growth and value, whereas the Vanguard Value ETF has zero exposure to these stocks.
NASDAQ: VONV
Key Data Points
A value ETF built for the modern stock market
The Vanguard Russell 1000 Value ETF is an excellent buy for value investors who agree with FTSE Russell's methodology that mature tech companies can be split between growth and value indexes rather than solely being included in growth indexes. The semi-annual reconstitution ensures that the ETF stays up to date with evolving investment theses.
For example, Alphabet's entire market cap is currently in the Russell 1000 Growth index, but I could see Alphabet becoming a split-market-cap candidate like Amazon, Apple, and Microsoft. Whereas even if Alphabet evolved into more of a value stock, the Vanguard Value ETF wouldn't be exposed unless it was completely removed from the Vanguard Growth ETF.
