Everyone likes a bargain, and value investors understand that they can take advantage of mispriced stocks in the market to reap big profits. You can find promising value stocks in every corner of the market, but even though the stocks themselves can look a lot different, they share fundamentally strong prospects that aren't fully reflected in their share prices.

Many investors use exchange-traded funds, or ETFs, to invest in value stocks. Below, we'll look at six value ETFs that investors turn to the most. First, though, let's look at exactly what value investing is and how it can meet your investing needs.

What is value investing?

Value investing generally refers to the idea that the best investments are those that the market isn't pricing properly. Most value investors look at companies whose stocks have suffered dramatic losses, figuring that in many cases, the market's reaction to bad news is overblown and punishes a company too much. The idea is that once the company recovers from whatever setback made its shares fall, investors will realize the true value of the underlying business, and the stock will recover, producing substantial returns for those who were willing to invest during the most uncertain time for the company.

In addition to the prospect for solid returns, another advantage of value investing is that it tends to focus on mature, stable companies that are fairly reliable in their business models. In contrast to unproven high-growth stocks that can flame out quickly, value investors typically pick more defensive stocks that are less volatile, making them more comfortable choices for those who prefer safer investments.

But it's important to understand that value investing has its risks. Hidden dangers can lurk beneath the surface at companies, trapping would-be bargain hunters into making what turn out to be ill-fated investments. Some top value investors go through each individual stock to ensure that they can separate out the best prospects from the value traps. But as you'll learn below, the advantage of ETF investing is that you can invest in a broad range of value stocks, diversifying your portfolio so that if there happens to be a bad apple among the bunch, it won't have a devastating impact on your overall holdings.

What is an ETF?

Exchange-traded funds have been around for about 25 years, and they are a simple way for investors to own shares of multiple stocks using a single investment. Most ETFs track an index made up of multiple stocks, and the ETF buys shares of all of the stocks in its particular target index. Advantages include the ability to buy and sell at any time during the trading day, and for those who have only small amounts of money to invest, ETFs let you get exposure to many different stocks rather than only being able to afford one or two individual stocks to buy.

To compensate the operator of the ETF for the work it does to buy and sell stocks, set up the ETF, and deal with regulatory and compliance issues, investors have to pay an expense ratio. This is a specific percentage of assets that go to cover the annual expenses of the ETF. For instance, if a fund has an expense ratio of 0.20%, then an investor who owns $1,000 worth of shares can expect to have $2 of the fund's assets taken out of the ETF each year to pay for the operating costs of the fund. Nevertheless, if you want to track a common benchmark closely, it's hard to find cheaper alternatives than ETFs.

With all that in mind, here are six value ETFs that you can turn to in order to get the particular stocks that match up with your investing principles as a value investor.

Value ETF

Assets Under Management

Expense Ratio

5-Year Total Cumulative Return

iShares Russell 1000 Value (NYSEMKT:IWD)

$36.9 billion

0.20%

71%

Vanguard Value (NYSEMKT:VTV)

$36.7 billion

0.06%

84%

Vanguard Small-Cap Value (NYSEMKT:VBR)

$12.9 billion

0.07%

86%

iShares Russell Mid-Cap Value (NYSEMKT:IWS)

$10.6 billion

0.24%

73%

iShares Russell 2000 Value (NYSEMKT:IWN)

$9.27 billion

0.24%

73%

Vanguard Mid-Cap Value (NYSEMKT:VOE)

$8.58 billion

0.07%

87%

Data source: Fund providers.

2 ETF leaders go head-to-head

iShares and Vanguard are the biggest players in the ETF universe, so it makes sense that their respective value ETFs would do such a good job of getting investors to buy shares of their funds. As you can see above, Vanguard puts more emphasis on reducing costs to the absolute maximum, with expense ratios that are less than a third what iShares typically charges. iShares tends to stress ease of tradability of its ETF shares, and its funds tend to be among the most liquid in daily trading. For long-term investors, that factor isn't quite as important, but for those who trade ETF shares frequently, the resulting reduction in trade-related expenses can make a material difference in long-term performance.

You'll see below that each of the three funds that iShares and Vanguard put up on this list addresses different sizes of companies. Their recent returns don't necessarily reflect much difference across large-cap, mid-cap, and small-cap value stocks, but your investment strategy might still call for allocations across stocks of different market capitalizations in order to be better diversified when their relative returns diverge in the future.

White mosaic tiles spelling ETF against a yellow mosaic background.

Image source: Getty Images.

1. iShares Russell 1000 Value

The iShares Russell 1000 Value ETF is the largest value ETF available, edging out its Vanguard counterpart. The Russell 1000 index includes the top 1,000 large-cap and mid-cap stocks in the U.S. stock market, and the iShares ETF invests in a subset of that list, with the Russell 1000 Value index focusing on the companies with relatively lower price-to-book ratios, or how share price relates to a company's book value, and lower forecast growth than their peers in the broader Russell 1000. The ETF holds about 700 stocks currently.

The ETF's performance has been solid, with the ETF producing average annual returns of 7.6% over the past decade. Because many of the stocks that the ETF owns pay dividends, investors currently enjoy a yield of about 2.25% on their investment, which can provide much-needed income for those who need to draw cash from their portfolios.

The ETF's portfolio has definite areas of concentration, with more than a quarter of its assets invested in the financial sector. Healthcare and energy stocks make up another quarter of the fund's assets under management, and the remaining half is split fairly evenly across the remaining sectors of the market.

2. Vanguard Value

The Vanguard Value ETF falls just short of its iShares counterpart's assets under management. It tracks a different index, the CRSP U.S. Large Cap Value index, which includes more than 300 stocks among its component companies. In developing the index, CRSP looks at relationships between share price and book value, forward and historical earnings multiples , dividend yields, and price-to-sales ratios, or how the stock price relates to annual revenue. The result is a narrower portfolio than the Russell 1000 Value Index that puts more emphasis on truly large-cap companies.

That methodology has led to slightly better performance over the long run. Over the past decade, the Vanguard ETF has returned an average of 8.4% each year. The ETF also sports a slightly higher income yield than its iShares counterpart, with a current yield of almost 2.5%.

You'll find the same concentration in financial stocks within the Vanguard ETF that the iShares ETF has, but the big difference is in the sizable 15% allocation to technology stocks that the Vanguard fund holds. That's been a large contributor to relative performance in recent years, and similar allocations to most other sectors make tech the standout for the ETF.

3. Vanguard Small-Cap Value

Small companies can be good values, too, and the Vanguard Small-Cap Value ETF seeks to identify those stocks. The CRSP U.S. Small Cap Value index looks at a much larger universe of potential candidates, and the Vanguard fund ends up selecting almost 900 different small-cap stocks for its portfolio. That added diversification is helpful, given the higher risk that small companies have compared to more well-established large companies.

Small caps have outperformed their larger counterparts over the past decade as well. The Vanguard Small-Cap Value ETF has produced average annual returns of 10.3% over the past decade. Small-cap stocks don't tend to have as much capacity to pay dividends, however, and that's a big part of why the ETF has a yield of below 2%.

From an industry standpoint, the ETF's holdings are even more concentrated than what you'll see in the large-cap realm. Financials and industrial stocks make up more than half of the ETF's assets, and consumer stocks and technology together add another 25%. Again, Vanguard's willingness to embrace tech stocks has helped performance, and that shows up even more clearly in the small-cap space.

4. iShares Russell Mid-Cap Value

The iShares Russell Mid-Cap Value ETF looks to split the difference between small and large stocks, focusing instead on those companies in the middle of the size spectrum. Russell looks at the 1,000 largest stocks in the market, which make up its Russell 1000 Index, and then cuts out the top 200. That leaves 800 stocks that it considers midcaps, and Russell then applies the same tests to determine which stocks meet its value criteria. The iShares ETF invests in nearly 600 of those stocks.

Performance has been superior to the broader large-cap offering from iShares, with average annual returns of 9.6% over the past 10 years representing a big boost. Mid-caps also have a reasonable capacity to pay out dividends, and the ETF's current yield is right around the 2% mark.

One interesting aspect of the ETF is that its portfolio isn't quite as concentrated as in other iShares value ETFs. Financials make up just 20% of the fund, with real estate, industrials, consumer discretionary stocks, and utilities all getting 10% to 13% allocations of fund assets. That arguably gives the fund greater diversification, and it also reflects the greater number of places where investors can find value in the mid-cap realm right now.

5. iShares Russell 2000 Value

iShares gets its small-cap value stock exposure by tracking the Russell 2000 Value Index, which includes that portion of the 2,000 next-smaller companies beyond the Russell 1000 that meet the same value characteristics that Russell looks for in all of its value-based benchmarks. That gives the ETF exposure to almost 1,400 small-cap value stocks, dwarfing the holdings of its Vanguard counterpart.

Performance has been solid, but it doesn't match up to what Vanguard has achieved. Average annual returns have been about 8.4% over the past decade. Yields of 1.75% reflect the lower payout capacity that many smaller companies have to make dividend distributions to their shareholders.

The iShares ETF has about 30% of its assets in financial stocks, but beyond that, its portfolio is slightly more balanced than its Vanguard counterpart's holdings. Industrials, consumer discretionary, real estate, and technology each have close to 10% allocations of fund assets, and you'll also find modest exposure of roughly 5% to 7% in energy, healthcare, utilities, and materials stocks.

6. Vanguard Mid-Cap Value

Finally, Vanguard weighs in with a mid-cap offering of its own. It tracks the CRSP U.S. Mid Cap Value index, which includes 200 mid-sized companies that meet the same value characteristics that CRSP uses in the large-cap space as described above.

Performance for the fund has been extremely strong. Over the past decade, average annual returns have been about 10.6%, outperforming small- and large-cap stocks in the space. An income yield of 2.2% also give the Vanguard ETF a slight advantage over its iShares Mid-Cap Value counterpart.

Financials carry the same overweight as you'll see in other Vanguard funds, with consumer stocks also getting about a 25% allocation within the fund. Industrials, tech stocks, utilities, and energy companies also have substantial presence within the ETF.

Picking the right value ETF

Most investors should look for a diversified approach in their investing, and that extends even to the ETF level. Choosing any one of these ETFs is a reasonable option, but the better choice is to allocate percentages to each market-cap range in order to balance greater opportunities from smaller companies against the higher risk they can sometimes pose. With their cost and recent performance advantages, the Vanguard value ETFs on this list could offer better long-term results for investors than their iShares rivals.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.