Value Stocks Shine over Long Periods
Researchers have come up with different explanations for the
"value premium", ever since Fama and French published their
famous research paper in 1992, showing outperformance of value
stocks over growth stocks over long term.
Further, numerous academic studies conducted since then have
shown that value stocks have delivered higher returns with lower
volatility compared with growth stocks over the long term in
almost all the markets studied. (Read:
3 Excellent ETFs for Growing Dividends
Does that mean that investors should ignore growth stocks? Not
at all; growth stocks shine in certain market cycles and value
stocks in some others. But given their proven performance over
long term, value stocks and funds should be a predominant part of
any 'core' portfolio.
Also, while some of the small cap companies have high return
potential, they are mostly riskier and require frequent
monitoring, and on the other hand established large cap companies
with solid balance sheets and stable cash flows are less risky
and thus more suitable for long term investors. (Read:
3 ETFs for Rising Rates
Are Cheaper Funds Better?
Expense ratios are an important factor in the return of an ETF
and in the long-term, cheaper funds can significantly outperform
their more expensive cousins, other things remaining the
The following table shows how high expanses can affect
fund returns. In the example, we put $10,000 in three funds, with
annual expense ratios of 0.10%, 0.50% and 1.00% respectively and
assumed that all three of them returned 8% per annum. (See:
3 Biggest Misatakes of ETF Investing
The difference in returns becomes very significant as we
increase the holding period. For the purpose of simplicity of
calculations, we have ignored transaction costs and taxes.
|Value after 10 years
|Value after 20 years
|Value after 30 years
We may add that expense ratio is not the only cost involved in
investing in an ETF but it usually is the major cost but
investors need to look at other implicit costs too in addition to
Below, we have analyzed three large cap value
with ultra-low expense ratios that should be considered by
investors for their long-term, core portfolios.
Schwab U.S. Large-Cap Value ETF
SCHV provides broad exposure to large-cap U.S. stocks with
value style characteristics, representing about half of the
market capitalization of stocks in the Dow Jones U.S. Large Cap
Total Stock Market Index.
Launched in December 2009, the fund has so far been able to
attract assets worth $713.4M, which are invested in 356 holdings.
With an annual fee of just 7 basis points, this product is the
cheapest option in the space. Additionally, the dividend yield at
2.5% is quite attractive.
Financials (24.3%), Consumer Staples (12.2%), Energy (11.6%)
and Consumer Discretionary (11.1%) are the top four sectors, the
fund has invested in. With almost a quarter of the asset base
invested in financials stocks, the product is likely to benefit
from continued outperformance by the sector.
Exxon, GE, P&G, Chevron and Wells Fargo are among the top
holdings. With top ten holdings accounting for just about 27% of
the asset base, the fund is pretty well diversified.
SCHV is a Zacks Rank #1 (Strong Buy) ETF.
Vanguard Value ETF (
VTV follows a full-replication approach to track the
performance of the CRSP US Large Cap Value Index. With AUM of
$11.2 billion and an expense ratio of just 10 basis points, this
is one of the largest and cheapest funds within the space.
Exxon, J&J, GE, Chevron and Microsoft are among the top
holdings. The fund is quite well diversified with top ten
holdings accounting for just about 28% of the asset base.
Financials (22.6%), Healthcare (14.4%) and Energy (12.6%) are the
top sectors. The product has returned 18.8% year-to-date.
VTV is an Zacks Rank #2 (Buy) ETF.
Vanguard Russell 1000 Value ETF (
VONV tracks the Russell 1000 Value Index, which predominantly
comprises value stocks of large U.S. companies.
The fund charges a low expense ratio of 15 basis points while
the SEC yield is attractive at 2.2% currently. Financial
Services (29.6%), Energy (14.9%) and Healthcare (13.0%) are the
top sectors in terms of asset allocation. Looking at the
holdings-- Exxon, GE, Chevron, J&J and P&G occupy the top
spots. The fund holds 649 stocks with top ten holdings accounting
for about 27% of the asset base.
VONV is a Zacks Rank #1 (Strong Buy) ETF.
Want the latest recommendations from Zacks Investment
Research? Today, you can download
7 Best Stocks for the Next 30 Days
Click to get this free report >>
SCHWAB-US LCV (SCHV): ETF Research Reports
VANGD-RUS 1000V (VONV): ETF Research Reports
VIPERS-VALUE (VTV): ETF Research Reports
To read this article on Zacks.com click here.
Want the latest recommendations from Zacks
Investment Research? Today, you can download 7 Best Stocks for
the Next 30 Days. Click to get this free report