Is the Value premium dead? Probably not. With Value suffering a beating for a decade, let’s hope it’s time for its resurgence. Here we look at the best Value ETFs to capture value stocks in 2021.
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Contents
Introduction – Why Value Stocks?
If you’ve landed on this page because you’re looking for a Value ETF, you probably already know the answer.
Value stocks are thought to be underpriced relative to their fundamentals. These are usually relatively boring companies in the bargain bin. Unlike high-flying growth stocks like Amazon, Apple, etc., Value stocks typically don’t make the headlines.
Value stocks are sometimes downtrodden, forgotten stocks that have had a rough run, and are considered riskier than Growth stocks. While there are surely some behavioral components too, the theory goes that investors are compensated on average for taking on that extra risk, hence the “Value premium,” one of the risk factor premia discovered by Eugene Fama and Kenneth French that explain the differences in returns between diversified portfolios. This “Value factor” measures the relative cheapness of any given stock or fund.
Basically, every day when we wake up, we would expect Value to outperform Growth, and indeed it has historically. Here is a look at Value’s performance vs. Growth going back to 1972:
Unfortunately the Value factor has suffered in recent years, severely underperforming Growth. This has caused many to succumb to recency bias and jump on the Growth bandwagon, driving down its expected return. I don’t employ or advise market timing, but AQR maintains that Value has basically been the cheapest it’s ever been in the past couple years, suggesting that now may actually be the worst time to give up on the factor. Basically, the spread between Growth and Value has recently been as large as it’s ever been, meaning Value has looked extremely cheap and Growth is looking extremely expensive, meaning Growth now has lower expected returns.
We would also expect factors to have negative premiums from time to time, even for extended time periods. Value stocks have actually delivered a more reliable premium than the market historically. That is, there have been more periods Value has delivered a positive premium than the market, and there have been periods when the market premium was negative and the Value premium was positive.
AQR suggests Value is due for a comeback. This theory has been true so far in 2021, with Value exhibiting stellar performance. Conveniently, in March, 2021, Yara, Boonz, and Tamoni concluded that large value spreads have reliably preceded greater returns for Value and have provided statistically significant predictive power for those attempting to time Value, i.e. rotating in and out of Value stocks. Moreover, there has existed a positive relationship between the size of the spread and the future premium delivered – that is, the larger the spread, the larger the expected premium. Here’s what that spread looked like going into 2021:
So now that we know why we might want to tilt Value, especially right now with its higher expected returns in the near future, let’s explore the best Value ETFs that capture the expected premium most effectively.
Evaluating Value ETFs
Different Value ETFs have different exposure to the actual Value factor, written as HmL or high minus low. That just means some funds are more value-y than others. If we describe Value as cheap stocks, we would say a fund with a low loading on Value is capturing comparatively more expensive cheap stocks, while a fund with a high Value loading is capturing comparatively cheaper cheap stocks, if that makes sense.
We can measure this by performing a statistical regression on any given fund over a specific time period. In that manner, we can compare the relative exposure to Value among different funds at once – basically, do they provide the exposure they claim? And is one better than another? Usually a fund with superior exposure has a higher fee. In those cases, we want to try to estimate if we think the expected premium makes up for the fee delta and trading costs given the fund’s loading on Value.
The 7 Best Value ETFs
Given all that, here are what I think are the best Value ETFs for various cap sizes and geographies.
Most of the ETFs below are incorporated into my Vigorous Value Portfolio that I designed for those wanting to place some bets on Value.
AVUV – Avantis U.S. Small Cap Value ETF
I think AVUV from Avantis probably deserves the first mention. It has sort of been the golden child of the U.S. small cap value segment since its recent launch in late 2019, and for good reason. It provides some impressive exposure to the Size, Value, and Profitability factors, so much so that it replaced VIOV in my own portfolio.
In a nutshell, AVUV has done a great job so far of capturing small, cheap stocks in the U.S., at a relatively low fee of 0.25%, only 10 basis points higher than VIOV’s fee of 0.15%. We would expect its premium to more than make up for its greater fee. I included it in my list of small cap value funds here, and I compared it to some other popular small cap value funds in more detail in a separate post here.
AVDV – Avantis International Small Cap Value ETF
Similarly, AVDV from Avantis seems to be the clear choice for international small cap value exposure in Developed Markets. Previously we had to rely on some expensive dividend funds from WisdomTree as proxies to capture this corner of the global market, but Avantis is a factor-focused fund provider, so they’ve got a product tailored for it.
MDYV – SPDR S&P 400 Mid Cap Value ETF
If for some reason you want to target Value specifically within U.S. mid-caps, my choice would be MDYV. This fund from SPDR seeks to track the S&P 400 Mid Cap Value Index, which conveniently utilizes an earnings screen to give us some Profitability factor exposure as well. The fund has a fee of 0.15%.
Note that if you’re with Vanguard or if you just prefer a Vanguard fund, their equivalent fund for the same index is IVOV and it costs the same at 0.15%, but it is less popular than MDYV.
RPV – Invesco S&P 500 Pure Value ETF
For Value in U.S. large caps, it’s RPV from Invesco. The fund’s name is appropriate. Unlike some of its competitors, it delivers “pure value,” blowing the others (VONV, IUSV, etc.) out of the water in terms of actual Value exposure. Even though some of these competitors have a much lower fee, we would still expect a greater premium after fees from RPV.
Note that while this fund is selecting from the S&P 500, it still has positive loading on the Size factor, as the stocks exhibiting the greatest relative “cheapness” within the index happen to be smaller, and Invesco’s weighting scheme for this fund actually weights cheaper stocks more. That is, stocks exhibiting greater Value get a greater weight within the fund. RPV has nearly $3 billion in assets and an expense ratio of 0.35%.
EFV – iShares MSCI EAFE Value ETF
EFV from iShares captures large cap value stocks (and about 10% mid-caps) in developed countries in Europe, Australia and the Far East. This fund is market cap weighted and costs 0.39%. This fund is very popular, with assets of about $15 billion.
DGS – WisdomTree Emerging Markets SmallCap Dividend Fund
With AVDV above for small cap value in Developed Markets, I mentioned having to previously use a dividend-oriented fund from WisdomTree as a proxy. Well for the very narrow segment of small cap value in Emerging Markets, we still have to do that, as there’s no ETF yet to capture this small corner of the market. However, Avantis recently filed with the SEC for a fund to do exactly that, so keep your fingers crossed, but that may not happen for a while, and even then we’d probably want to wait to see how it matures and what actual exposure it’s able to provide.
For now, we want to use DGS from WisdomTree. Value factor chasers have wisened up to the exposure this fund provides, as it boasts over $2 billion in assets. This narrow exposure comes at a fairly hefty price of 0.63%, but we would still expect its premium to make up for that fee, and it is indeed more expensive to trade in Emerging Markets.
AVEM – Avantis Emerging Markets Equity ETF
Similarly, there’s really nothing available to capture large- and mid-cap value in Emerging Markets either except from some relatively expensive multifactor funds. Again, if Avantis is granted their new filing for an Emerging Markets value ETF, it should cover all cap sizes while focusing on smaller stocks, which would obviate the need for two separate Emerging Markets funds.
For now, they have AVEM, which is intended to provide broad Emerging Markets exposure with very light factor tilts. Does that mean it will make up for its fee of 0.33% compared to 0.10% for Vanguard’s VWO? The jury is still out.
Adding These Value ETFs To Your Portfolio
All these value ETFs above should be available at any major broker. My choice is M1 Finance. M1 has zero trade commissions and zero account fees, and offers fractional shares, dynamic rebalancing, and a sleek, user-friendly interface and mobile app. I wrote a comprehensive review of M1 Finance here. Investors outside the U.S. can use eToro.
If you have a globally diversified portfolio of broad index funds already (e.g. VTI, VXUS, etc.) and you want to tilt/overweight Value, I’ve assembled all these funds into what I called a little “Value Pack” pie for M1 Finance that you can find here. Think of it like a spice packet you’d add to a soup or something. This is basically what I did with the Vigorous Value Portfolio. Weighting it at 10% would mean you have about a 10% Value tilt, for example. I’ve weighted the funds roughly equal to their relative global market weights. Don’t use it as your entire portfolio unless you want to quite literally go all in on Value! You’d be missing out on basically half the global stock market comprised of Growth stocks.
Also, again, most of these ETFs above are also incorporated into my Vigorous Value portfolio, if that interests you.
Disclosures: I am long AVUV, DGS, AVEM, and AVDV in my own portfolio.
Interested in more Lazy Portfolios? See the full list here.
Disclaimer: While I love diving into investing-related data and playing around with backtests, I am in no way a certified expert. I have no formal financial education. I am not a financial advisor, portfolio manager, or accountant. This is not financial advice, investing advice, or tax advice. The information on this website is for informational and recreational purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. Do your own due diligence. Past performance does not guarantee future returns. Read my lengthier disclaimer here.
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