The investment market sometimes divides stocks into two types: value stocks and growth stocks. Value stocks mainly refer to stocks whose stock value is undervalued. The growth stock index has growth potential. Because of the rapid growth rate, the price of this type of stock is relatively high. In many cases, it is not always possible to use the dichotomy to divide all stocks into value stocks and growth stocks. After all, growth stocks may also encounter some conditions (the overall stock market plummets) and cause their prices to be undervalued. Since the Vanguard S&P 500 Growth ETF was introduced a few days ago, this time I will introduce his brother fund Vanguard S&P 500 Value ETF (Vanguard S&P 500 Value ETF).

Introduction to ETF

Let's first take a look at some basic information about Vanguard S&P 500 Value ETF:

ETF analysis

The stock selection logic of Vanguard S&P 500 Value ETF

Vanguard S&P 500 Value ETF selects the most valuable companies in the S&P 500 index. How to judge which company is valuable? The S&P 500 Value Index uses three indicators to measure: the price-to-earnings ratio, the price-to-net ratio and the price-to-revenue ratio. Using these three indicators, the S&P 500 Value Index selects the most valuable companies in the S&P 500 Index (or companies with relatively low valuations). As can be seen from the following table, the average PE ratio, price-to-net ratio, price-to-revenue ratio, and stock-to-cash flow ratio of the Vanguard S&P 500 value ETF are significantly lower than the Vanguard S&P 500 growth ETF.

Source: Morningstar

S&P 500 Value ETF 's growth is relatively weak

Investors who want to invest in Vanguard S&P 500 Value ETFs need to know that the companies in the S&P 500 index are usually fully watched by the market, and many analysts are writing research reports. There are usually reasons why these companies are cheap. It may be that the management has been doing poorly for a long time, or that the industry in which it is located has been in a headwind position for a long time and is not favored by the market (such as energy stocks). It may be inaccurate from the point of view of value (whether it is cheap) alone. Therefore, I have specially compiled some materials here for readers' reference. The following is a comparison of the average revenue growth rate, cash flow growth rate and net worth growth rate of Vanguard S&P 500 value ETF and growth ETF. We can see from the table below that the average revenue growth rate of the Vanguard S&P 500 Value ETF, etc., has lost to the Vanguard S&P 500 Growth ETF. Although these are only the figures of the past year, if the growth rate in the next few years remains unchanged, we can understand why the market should underestimate these weaker growth stocks.

Source: Morningstar

The market value weight method is not particularly good for value investment

The S&P 500 Value Index uses a market-cap-weighted approach. In other words, the ratio of its constituent stocks to the ETF is allocated in proportion to the market value. The market value weight method is not unusable, but the effect of using it on value-based investment can be greatly reduced. This is because the market value of a cheap company is relatively low. Therefore, if the market value weight method is used to allocate, the proportion of ETF will not be too high. This will also cause a phenomenon that the most severely undervalued stocks account for a lower proportion of ETFs. On the other hand, the market value of stocks whose value is not undervalued may be slightly higher.

Vanguard S&P 500 value ETF 's top ten holdings

The top ten holdings of the Vanguard S&P 500 Value ETF account for approximately 21.10% of the overall ETF. These are all well-known large companies in the United States. Buffett, its largest shareholder, Berkshire Hathaway, is a well-known investor who specializes in value investing and has also created amazing returns for Berkshire shareholders in the past few decades. The Pioneer S&P 500 Value ETF also includes oil companies. Exxon Mobil and Chevron are both well-known multinational large energy companies. These companies are not favored by investors because of the weakening of oil demand in recent years, so their value is seriously underestimated. The other top ten holding companies also include the large American telecommunications companies AT&T and Verizon. Both companies have good cash flow. However, the telecommunications industry in the United States is highly competitive, especially the wireless mobile phone market is saturated. It is also possible that for this reason, the market is unwilling to give their share prices too high.

Source: Pioneer website

Risks and challenges

The stock prices of the constituent stocks of the Vanguard S&P 500 Value ETF may be severely undervalued, but this does not mean that their stock prices will not continue to fall in the event of an economic recession (or an emergency). When the recent coronavirus epidemic began to ferment in Europe and the United States, the price of the Pioneer S&P 500 Value ETF also shrank by about 35%. Although the valuation is relatively high, the price of Vanguard S&P 500 Growth ETF has only shrunk by about 30.5%.

in conclusion

The Vanguard S&P 500 Value ETF gives investors a channel to participate in value investing. However, his performance is inferior to his brother fund Vanguard S&P 500 Growth ETF. From its establishment (2010) to the end of March 2020, its total return rate is 148.5%. This figure is far below the 260% of Vanguard S&P 500 Growth ETF and the 207.5% of S&P 500 Index. However, in ten years in Hedong and ten years in Hexi, the performance of the past ten years does not represent future performance. Perhaps in the next round of the business cycle, value-based investment will again lead the way.