ETF Investors Debate What ‘Value’ Is

As the definition of the term warps, a few funds still adhere to the classic meaning.

Reviewed by: Lisa Barr
Edited by: Ron Day

Do you know what’s in your value ETF?  

If you own a large cap value exchange-traded fund, you may not know as instinctively as in the past. Not after the past few years’ market price action, as the obsession with growth stocks and some curious landing spots in value ETFs for stocks don’t exactly scream “Warren Buffett material.” 

A recent Wall Street Journal article covered a long-running debate over the meaning and significance of “value” in an ETF. It comes at the right time. In the same way that a current TV commercial jokes about overuse of “rock star” in the workplace, the investment advisory industry has given itself wide latitude over what is and what isn’t “value investing." 

The Journal article pointed out something that should come as a surprise to traditional value types. The piece focused on the iShares S&P 500 Value ETF (IVE). At $26 billion in assets, the fund was the third largest among 39 ETFs that came up in an screener for large cap value. 

IVE has multiple FAANG stocks in its top 10, including a few that don’t pay a dividend. The early advocates of dividend discount model-based value investing must surely be turning over in their graves.  

Are They Truly Large Cap Value ETFs? 

Furthermore, of that group of 39 large cap value ETFs, an eye-catching 15 of them (nearly 40%) currently carry trailing P/E ratios of about 15x or higher. That’s the consumer equivalent of “only” paying $5 for a cup of your favorite morning coffee when the neighborhood competitors are charging $5.50. It skips over the fact that, not too long ago, that coffee only set you back $3.50. 

So, what’s a well-meaning investment advisor or self-directed value ETF investor to do? In an effort to identify some long-term value ETFs that investors feel they can confidently bring home to Mom and Dad (if they are dyed-in-the-wool value investing types, of course), here is pair of ETFs for the truly stingy to check out. 

The First Trust Large Cap Value AlphaDEX ETF (FTA) has spent the past 16 years executing a quantitative screening process across several parts of the equity market. This $1.25 billion fund currently produces a 187-stock portfolio with all stock weightings at just over 1% or less than 1%. It yields 2.8%, and has produced an 8.8% annualized return over the 10 years ended June 30, 2023. Its trailing P/E sits at 13.5x, a more than 35% valuation discount to IVE’s 21.4x. 

Brandywine’s Actively Managed DVAL 

And then there’s the actively managed Brandywine Global Dynamic US Large Cap Value ETF (DVAL), overseen by a well-known institutional equity manager that many financial advisors will recognize by name from their longtime presence in the separately managed account business.  

DVAL has $155.3 million in assets in a fairly focused portfolio, with many stock positions in the 3% range or so. Its portfolio turns over at around a 52% annualized clip. It sells for 11.5x earnings, and hung in well during 2022, losing just 6%. So far this year it is up a similar amount.  

But please, don’t call it a rock star. It’s just doing its job to try to stay true to the basic traditional Wall Street measuring stick called “value,” even if not all of its peers are staying in line with that ideal as this tech-obsessed era continues, and value stocks get relegated to the back pages. At least for now. 

Rob Isbitts was an investment advisor for 27 years before selling his practice to focus on ETF research and education. He is based in Weston, Florida. Contact him at  [email protected] and follow him on LinkedIn.