Value Investing In ETFs Requires Time

May 01, 2017

In the last decade, value investing has not worked very well, consistently underperforming growth. That performance is a reminder of just how cyclical factors can be, and how important time horizon is when you are trying to capture a risk premium.

Consider the performance of one of the largest value ETFs, the Vanguard Value Index Fund (VTV), relative to its growth counterpart, the Vanguard Growth Index Fund (VUG), in the past 10 years: 

If you are a value investor, you probably know this well: “At its core, value is an uncomfortable trade,” John West, of Research Affiliates, told an audience of investors, advisors and asset managers at the Morningstar Investment Conference in Chicago this week.

The pain comes from buying cheap in the hopes of capturing upside, but running the risk that the cheap will get far cheaper before they recover. It’s hard to hold on to your conviction when you are wondering if what you own isn’t a value play but a value trap.

To that end, fund sponsors and asset managers look at all sorts of value metrics, combining various approaches in search of a true value portfolio. In the ETF market, that effort translates into 50 value ETFs, with no two alike.

Top Heavy In Assets

The leader, the iShares Russell 1000 Value ETF (IWD), with $37 billion in assets, commands nearly 25% of all assets in value ETFs today. This is a pocket of the ETF universe that’s top heavy in terms of assets—the three biggest ETFs, all targeting U.S. large-cap value, command more than $80 billion in assets, which is more than the total assets in the remaining 46 ETFs combined.

They are:

On the surface, these three funds aren’t all that different, but they offer a glimpse into how you can tackle value through slightly different approaches even when going rather vanilla.

 

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