VOOV: Vanguard’s Value ETF – Berkshire, Exxon Mobil, JNJ Lead The Way (NYSEARCA:VOOV)

As you know, the 2022 bear-market has caused a significant rotation out of arguably over-valued growth stocks and into more “value” oriented companies. That being the case, one option investors should consider is to allocate some capital to the Vanguard S&P500 Value ETF (NYSEARCA:VOOV). This ETF focuses on tracking the returns of the S&P500 Value Index and has an impressive 10-year average annual return of 10.8%. The ETF has also outperformed the S&P500 by ~12% over the past year (see below). Being a Vanguard fund, the VOOV ETF has a relatively cost-efficient expense ratio of 0.10%, has a current SEC 30-day yield of 2.10%, and trades at a significant discount to the S&P500, which I will discuss later in this article.

Investment Thesis

The case for investing in “value” stocks in the current macro-environment are numerous, starting with the fact that higher interest rates are compressing the market is willing to pay for “growth” stocks because the premium investors are willing to pay for future discounted cash-flow has shrunk as interest rates have risen. Meantime, investors are looking for solid dividend income, which “value” stocks typically payout to them.

In addition, and from a psychological standpoint, many “nervous Nellie” investors who have seen their portfolios take a big hit this year, likely hear the word “value” and associate it with the general SWAN narrative (i.e. “sleep well at night”). Indeed, at glance at the metrics below shows that the VOOV ETF is trading at wide valuation discount as compared to the S&P500 as represented by VOOV’s sister fund: the Vanguard S&P500 ETF (VOO):

As you can see from the graphic, from a P/E perspective, the VOOV ETF trades at an 11.3% discount to the S&P500, while its price-to-book valuation is a whopping 27% lower. The flip-side of the coin, of course, is that the S&P500 has a higher ROE and earnings growth rate. However, the thought process here is that those growth advantages for the S&P500 will start to deteriorate if economic growth continues to slow.

With that as background, let’s take a closer look at the VOOV ETF and see how it has positioned investors for success going forward.

Top-10 Holdings

The top-10 holdings of the Vanguard S&P500 Value ETF are shown below and were taken directly from the VOOV webpage. VOOV’s top-10 holdings equate to what I consider to be a well-diversified 19% of the entire 446 company portfolio:

The #1 holding is the Warren Buffett led company Berkshire Hathaway (BRK.B) with a 3.1% weight. In Berkshire’s latest SEC Form 13-F filing, the company’s top-6 holdings (as of 9/30/2022) are as follows:

As can be seen, Apple (AAPL) is far and away Berkshire’s #1 position (larger than the next 5 positions combined) and, despite all the media attention focused on Buffett and Occidental Petroleum (OXY), note that Berkshire holds a nearly 2x bigger position in leading international integrated oil & gas company Chevron (CVX). It’s also interesting to note that while Buffett himself loves dividends, Berkshire does not pay one, which is unfortunate considering the nice income that a company like Chevron throws off ($5.68/share on an annual basis). Note Chevron is also the #4 holding in the VOOV ETF.

The second largest holding in VOOV with a 2.7% weight is Exxon (XOM). After the “lost decade”, in which Exxon actually had a negative total return, Exxon has been enjoying resurgence this year. Reduced spending – arguably under the influence of three new Engine #1 board members whose top priority is to significantly increase shareholder returns – combined with high O&G prices, have enabled the company to deliver record free-cash-flow this year. (Consider reading my popular Seeking Alpha Editor’s Choice article: How Tiny Engine #1 Was Able To Turn Exxon Around.) The following chart shows Exxon’s one-year performance along with Berkshire’s top-two O&G holdings – all of which have significantly outperformed the S&P500 as represented by the VOO ETF:

Clearly, the O&G sector has been the place to find “value”, income, and capital appreciation this year.

The consumer staples sector is well represented in the VOOV ETF with Proctor & Gamble (PG), Coca-Cola (KO), and Wal Mart (WMT) holding down the #5, #8, and #9 positions in the top-10 with an aggregate weighting of 4.4%. All three have outperformed the S&P500 over the past year, but PG appears to have been a relative disappointment considering the Consumer Staples SPDR ETF (XLP) has returned 5.4% over the past year:

Overall, the VOOV portfolio is relatively over-weight the Consumer Staples, Energy, Financials, and Health Care sectors as referenced by the S&P500 weight of the Sector SPDR ETFs (as shown in red and added by the author):

Performance

The VOOV ETF – has an admirable long-term performance track-record, with a 10-year average annual return of 10.8%:

The graphic below compares the three-year total returns of the VOOV ETF with some of its peers, including the Vanguard Value ETF (VTV), the iShares S&P500 Value ETF (IVE), and the Cornerstone Strategic Value ETF (CLM):

As can be seen, VOOV’s sister fund, the VTV ETF, leads the pack and beats VOOV by an impressive 6%+. Part of that out-performance comes from the fact that VTV has an expense ratio of only 0.04%, 6 basis points lower than VOOV.

Risks

While the risks of owning the VOOV Value fund are – in my opinion – considerably less than owning, say, the S&P 500 or the Nasdaq-100 triple Q’s, the ETF is certainly not immune to the overall macro environment headwinds: the still continuing shutdowns in China and supply-chain challenges related to the global pandemic, higher inflation, higher interest rates, and the impact of Russia’s horrific war-of-choice on Ukraine that has broken the global energy & food supply chains and led to rampant inflation all over the globe. Any or all of these factors could lead to a significant slow-down in the global economy and/or a potential severe recession and a related downdraft in the stock market.

That being the case, I advise investors who are considering establishing a position in the VOOV ETF to scale-in over time. That way, you won’t kick yourself for having gone “all in” at the top of a “bear-market rally,” and you will have taken advantage of market volatility to use down-cycles to dollar cost average into your position.

Summary & Conclusion

I like the idea behind the Vanguard S&P500 Value ETF, but I question the implementation. I say that because the fund holds 446 of the 500 companies in the S&P500. Are 89% of the S&P500 companies really “value” oriented? I have my doubts. Even if they are, why not pick the top, say, 100 and focus on them?

Secondly, the expense ratio of VOOV is 6 basis points higher than Vanguard’s own VTV ETF. Why not merge the two ETFs and keep VTV’s lower expense fee? That is especially the case given the fact that VTV has significantly outperformed VOOV over the past 3-years. So, although I do believe VOOV is a solid performer with an attractive portfolio and an admirable long-term track record (and I rate it a BUY based on those factors), if you hold VOOV in a retirement account and will not face any adverse tax consequences, I would trade out of VOOV and move the proceeds into the VTV fund instead.

I’ll end with a 5-year total returns comparison of VOOV to VTV and to the S&P500 as represented by the VOO ETF and note that, despite the 2022 bear-market, VOO still leads the pack by a significant margin: