Is VTV A Good Long-Term Buy For Value Investors? (NYSEARCA:VTV)

Article Thesis

Value investors have seen their investments perform well in recent months, as many overpriced growth names underperformed and as materials, energy, and other value sectors benefitted from macro tailwinds.

Investors can get value exposure by investing in individual stocks or by choosing from diversified ETFs. The Vanguard Value ETF (NYSEARCA:VTV) is one such choice that we’ll look into in this article.

VTV Key Metrics

Specialized ETFs are smaller than broad market replicating ones such as SPY (SPY), but due to the fact that value investing appeals to many investors, VTV is still a relatively large ETF, with assets under management of $93 billion. Due to its value focus, it doesn’t invest in all of the mega-caps, as those oftentimes trade at rather high valuations – think Tesla (TSLA) or Amazon (AMZN). According to its fact sheet, VTV’s biggest holdings are the following ones:

Berkshire Hathaway (BRK.A) (BRK.B) being the number one holding makes sense – not only is it one of the largest not-expensive names in the investment universe, but it is also a value investor favorite due to Warren Buffett’s value investing approach.

UnitedHealth (UNH), Johnson & Johnson (JNJ), Procter & Gamble (PG), Pfizer (PFE), and AbbVie (ABBV) are other major holdings of VTV. They are common value names, and they are also noncyclical or recession-resilient. That’s an important investment theme for many value investors, as it reduces investment risk further.

Exxon Mobil (XOM) and Chevron (CVX) are two other major holdings. Oil companies are naturally more cyclical than consumer staples or healthcare names, but both are pretty cheap today. In fact, both are trading at steep discounts compared to how they were valued in the past:

Today, XOM trades at a 30% discount to its 5-year median valuation, while Chevron trades at a 25% discount, using the enterprise value to EBITDA metric.

Vanguard Value ETF contains a total of 350 names, making it a very diversified ETF overall. Still, investors should note that the top holdings have an outsized percentage in the ETF, with the top 10 names making up around 20% of assets under management.

The ETF’s value focus results in an above-average dividend yield, even though VTV does not have a dedicated income focus. Still, since high-growth names that oftentimes do not pay any dividends at all (such as AMZN) are not core holdings here, unlike in the S&P 500, VTV’s dividend yield is higher than that of the broad market. At a 2.2% dividend yield, VTV offers solid, but not spectacular income. For those seeking a high income stream, investing in dedicated income stocks, such as some of VTV’s holdings including AbbVie or Johnson & Johnson, could be a better idea compared to investing in a broad-based ETF such as VTV.

For ETF investors, costs are an important factor to consider. In that regard, VTV isn’t a bad choice. Its expense ratio is just 0.04% according to Seeking Alpha, making it one of the cheapest ETFs to own. SPY, a broad-market ETF with even higher assets under management, has a 0.09% expense ratio for comparison.

Is VTV A Good Value ETF?

Vanguard Value ETF isn’t the only value ETF. Due to its very low costs, it is one of the more favorable ones, however. Depending on your investment goals, a non-broad-based value ETF might be the better pick for you, however. Some investors might want to choose a more dedicated yield-focused ETF with a value approach, or a value ETF with a specific industry focus – such as healthcare or consumer staples.

Is VTV A Good Long-Term Investment?

Over the last decade, Vanguard Value ETF has delivered a return of 160%. When we include dividends, the total return was 240%. That pencils out to 13% annually. The broad market (S&P 500) offered slightly higher returns over the last decade, but VTV still was a compelling investment with the returns it offered. Over a longer time frame, returns were somewhat weaker, however:

In the above chart, we see Vanguard Value ETF’s total returns since inception. The 380% return in a little less than 20 years equates to an annual return in the 9% range. Past returns don’t equal future returns, but still, Vanguard Value ETF’s compelling history could be a good sign of what investors can expect in the future. During times when interest rates are low and/or declining, growth names tend to outperform. That was the case during the initial phase of the pandemic, for example, when a lot of cheap money made high-growth names explode upwards. Today, interest rates are rising, which could make value names outperform, as those are usually less vulnerable to an increase in the discount rate. From a macro perspective, value could thus be a good theme in the coming years, at least compared to growth names that will likely be more vulnerable to the Fed’s tightening cycle.

If equities drop sharply, which could happen due to factors such as a potential recession or macro crisis, Vanguard Value ETF would most likely decline as well. It might still outperform the broader markets, however. Many of its major holdings, such as Pfizer, AbbVie, Procter & Gamble, and so on have noncyclical business models and betas in the 0.4 to 0.8 range, meaning they generally move less than the broad market. If the broad market drops, VTV would thus most likely drop as well, but potentially to a lesser degree compared to a broad market ETF such as SPY. From a risk perspective, that could be attractive to investors.

Is VTV A Buy, Sell, Or Hold?

ETFs give exposure to a diversified range of companies. That even holds true for themed ones such as Vanguard Value ETF. Among its 350 companies, naturally, some will run into issues over time. That is balanced out to a degree thanks to other companies performing better, but still, stock pickers might be able to avoid that altogether (although there is no guarantee for that).

On top of that, VTV is not necessarily investing the most money into the highest-reward picks, as it is mostly market-capitalization-weighted. If, for example, small-cap stocks were to offer especially promising returns, VTV might be underexposed to those. A stock picker that is able to identify those especially attractive stocks could thus outperform VTV over time.

I personally do, thus, not invest in ETFs primarily. Instead, I own individual stocks – many of those are value stocks, including some of the VTV top holdings, such as BRK and ABBV. Other top holdings in VTV are not among my favorite names, however. Bank of America (BAC) and JPMorgan (JPM) are solid bank investments, but due to its ultra-low valuation, I prefer Citi (C) in that space. Depending on your goals, portfolio construction, and so on, ETFs could be a solid choice, however. In that case, VTV seems like one of the best ideas for a value-oriented portfolio I believe.