Who needs another value-oriented ETF? Maybe you.
SSgA launched the SPDR S&P 1500 Value Tilt ETF (NYSEArca: VLU) in late October, bringing a second choice to a somewhat-overlooked corner of the U.S. equity space.
VLU, along with the more-established FlexShares Morningstar U.S. Market Factor Tilt ETF (NYSEArca: TILT), aren’t your typical value funds. VLU just launched and TILT is a $150 million fund that came to market about a year ago.
The typical style fund sorts the equity universe into value and growth stocks using fundamental ratios. These ratios can include price-to-earnings and price-to-book among others. But, the most basic distinction is that the typical value funds hold some stocks but not others. For example, an S&P 500 value fund might hold about 250 stocks.
Funds like VLU and TILT use a different approach. They hold all of the stocks in the universe but give the value stocks more weight.
On the face of it, this strategy sounds like it produces a watered-down value fund with imprecise exposure.
But in my view, these funds make sense as a single-fund solution for long-term value investors who also believe that completely ignoring half of the market makes little sense.
The tilt approach is consistent with the Fama-French model for stock valuation that says market risk or beta is the dominant risk factor, but that size and style also play a role.
The implication is that investors should consider size and style—specifically, a bias to value and smaller stocks—but should also own the total market.
In theory and in practice, this means that a value-tilt fund will hold a growth stock like Apple, whereas a plain-vanilla value fund won’t.
Tilts In Your Portfolio
Of course, one can get total market exposure with a value tilt by simply combining a total market fund with a value fund. ETFs are supremely modular, so mixing and matching allows for tailoring the size of the tilt and trimming it over time.
VLU and TILT offer the convenience of this kind of exposure in one bundle. While they give up flexibility, the bundled nature of these tilt funds enforces a kind of discipline that keeps investors from too-frequent adjustments while still providing an ongoing rebalance to keep the planned exposure in line.
Since today’s investors have to look outside of U.S. equities too, keeping the domestic stock exposure simple and stable also has merit.
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