In February 2018, Vanguard debuted a number of exchange-traded funds (ETF) that use rules-based quantitative models to analyze U.S. stocks. There's the Vanguard U.S. Momentum Factor ETF , which hops on stocks that are taking off . Or the Vanguard U.S. Quality Factor ETF , which invests in companies based on strong core metrics like profitability and return on equity.
Then there's the Vanguard U.S. Value Factor ETF (NYSEMKT: VFVA) -- which has tons of bargain-bin and dividend-focused companies. The ETF sports a 2.4% yield. So investing $15,000 in the fund and waiting three years should generate at least $1,000 in dividend income during that period.
Here's why the Vanguard U.S. Value Factor ETF is worth buying now, as well as some risks to consider.
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Value investing through a quantitative lens
The first thing you may notice about the Vanguard U.S. Value Factor ETF is that it is extremely diversified. It has 575 holdings, with no individual holding more than a 1.2% weight in the fund. It also has a 0.13% expense ratio, which isn't as cheap as the Vanguard S&P 500 ETF 's 0.03% expense ratio. But still, $15,000 invested in the Vanguard U.S. Value Factor ETF would incur less than $20 in annual fees -- so the fee difference really only matters when dealing with millions of dollars.
The fund assigns allocation based on a value factor. You can think of the value factor as a rubric for determining which companies are included or excluded from the fund. According to Vanguard, the value factor is based on book value/price, forward earnings/price, and operating cash flows/price (for non-financials only).
This rules-based approach to allocation means that it doesn't matter what a company's market or industry is so long as it scores high on these criteria. One look at the top 10 holdings of the fund, and you'll get a pretty good idea of what to expect from the Vanguard U.S. Value Factor ETF.
Company | Weighting |
|---|
Altria Group | 1.2% |
General Motors | 1.1% |
Ford Motor Company | 1.1% |
FedEx | 1.1% |
AT&T | 1% |
CVS Health | 1% |
Comcast | 1% |
Verizon Communications | 1% |
ExxonMobil | 0.9% |
Bank of America | 0.9% |
Data source: Vanguard.
Even the top holdings don't have high weightings. Since valuation is a key component of the fund's quantitative approach, you will see companies that many view as stodgy, low-growth, or negative growth businesses (like Altria Group) or cyclical companies that carry a lot of debt, so they tend to sport dirt cheap valuations (like automakers or telecom companies).
The value approach starkly contrasts Vanguard's flagship Vanguard Value ETF (NYSEMKT: VTV) , which is market-cap weighted and looks at value through the lens of quality and the ability to grow earnings rather than on what the company is worth today based on its assets or trailing earnings.
A contrarian way to approach the stock market
The Vanguard U.S. Value Factor ETF is nothing like the S&P 500 . Top holdings carry so little weight, and the ETF is also heavily concentrated in sectors utterly different from the S&P 500.
Sector | Vanguard U.S. Value Factor ETF | Vanguard S&P 500 ETF |
|---|
Financials | 26.4% | 12.4% |
Consumer discretionary | 16.5% | 10% |
Industrials | 14.6% | 8.1% |
Energy | 12.9% | 3.6% |
Health care | 8.1% | 11.7% |
Consumer staples | 7% | 5.8% |
Technology and communication services* | 5% | 41.8% |
Basic materials | 4.8% | 2.2% |
Telecommunications | 4.3% | 0% |
Real estate | 0.4% | 2.1% |
Utilities | 0% | 2.3% |
Data source: Vanguard. *Note that the Vanguard S&P 500 ETF includes telecommunications in its communication services sector weighing, whereas the Vanguard U.S. Value Factor ETF separates telecommunications as its own sector.
The U.S. Value Factor ETF will screen out many red-hot growth stocks and focus on sectors with low price-to-earnings and price-to-book values. Banks tend to have particularly low metrics in both categories, so it makes sense that financials is the top sector.
Stodgy yet solid returns
Even as growth stocks have driven the bulk of gains in the broader market over the last several years, the U.S. Value Factor ETF has done a surprisingly decent job of putting up solid returns. In fact, it has nearly matched the performance of the Dow Jones Industrial Average since the fund's inception on Feb. 13, 2018.
^IXIC data by YCharts
It's also interesting to note that the fund was close to even with all the major indexes in late 2022 after a significant drawdown in growth stocks, the S&P 500, and the Nasdaq Composite . Only recently have the Nasdaq Composite and S&P 500 widened their lead -- thanks primarily to impeccable gains from megacap growth companies.
A unique ETF that may appeal to certain investors
The U.S. Value Factor ETF takes a traditional deep value approach to its selection process. It reminds me a bit of the cigar-butt investing style that Warren Buffett used to practice in his early years. The idea is to invest in companies that are cheap based on what they own (assets) or what they make (profits) rather than speculate about where a company will be years from now.
The fund certainly has its drawbacks and isn't for everyone. But the yield is fairly good and the performance over the last six-and-a-half years has been good, too. Overall, the fund may be a worthwhile option for risk-averse investors looking to put savings to work in the market, or anyone looking to branch outside of the megacap growth names that now make up such a massive portion of the S&P 500.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bank of America, FedEx, Vanguard Index Funds-Vanguard Value ETF, and Vanguard S&P 500 ETF. The Motley Fool recommends CVS Health, Comcast, General Motors, and Verizon Communications and recommends the following options: long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy .
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