S&P 500 Value ETF: Facing Off Vanguard's Value Funds

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I have recently written about the Vanguard Value ETF (VTV) and, more generally, about value stocks. In my report, I reached two key conclusions based on both qualitative and quantitative observations:

  1. Although the US is likely to undergo one of its shortest (albeit deepest) recessions on record, we don’t seem to be out of the woods yet. An environment of economic recovery and prosperity, in which value investing would likely perform best, still seems to be just outside our reach.
  2. On the other hand, the data suggests that now may be the time to jump out of growth and into value. Never in the past 40 years at least has growth outperformed value by this much. When it got close enough, value strategies ferociously outperformed in the following 12 months.

Now, I set aside the value vs. growth debate for a moment. Assuming a value approach, my next question is: what might be the best fund to invest in? Today, I compare the key features of VTV against those of its very close cousin, the Vanguard S&P 500 Value ETF (VOOV).

Credit: Dave Elder-Vass

Facing off Vanguard’s ETFs

At first glance, VTV and VOOV appear very comparable, as the differences are nuanced. VTV tracks the US Large Cap Value Index assembled by the CRSP (Center for Research in Security Prices), while VOOV tracks the S&P 500 Value Index created by S&P Global.

Each index has a slightly different approach to defining “value.” For example, VTV’s benchmark takes into consideration metrics like historical earnings-to-price ratio (i.e. the inverse of trailing P/E) and dividend-to-price ratio (i.e. yield), whereas VOOV’s does not. The end result are two portfolios that overlap as follows:

Source: ETF Research Center

The figure above may not do a good enough job at conveying how similarly the ETFs tend to perform over time. Using Portfolio Visualizer, one can see that VTV has historically done better than VOOV, but not by much: annualized return of 11.0% vs. 10.4%, Sharpe ratio (i.e., risk-adjusted return) of 0.81 vs. 0.74, and nearly identical maximum drawdowns at month-end prices of around 25%.

A closer look under the hood reveals the following differences between the funds that might be relevant for investors (see table further below):

  • Compared to VOOV, VTV seems better suited for those “looking for a deal”: slightly lower valuations, slightly higher dividend yield, and minimally better management fees.
  • Although both funds hold a large number of stocks that exceed 300 in both cases, with similar portfolio concentration at the top ten holdings, VOOV’s average market cap is about 20% lower than VTV’s. The more meaningful exposure to mega cap names, by the way, may best explain VTV’s slightly better performance in the past decade.
  • VOOV is significantly smaller and more thinly traded than VTV. However, both are large enough to ensure that most (if not all) retail investors can count on plenty of liquidity to enter or exit positions as needed.

Source: D.M. Martins Research, data from multiple reports

The verdict

Before deciding whether to buy VOOV or VTV, investors should first figure out if a value strategy may be right for them. To help with this discussion, I would direct readers to my most recent article on value investing in the current market environment.

Setting aside this important first question, I believe VTV edges its VOOV counterpart by a slight margin. Although both ETFs would very likely produce similar results going forward, generally speaking, VTV has a small advantage in yield, fees, size and even historical performance.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.