Value Investing in the Modern Era: A Flaw in the Vanguard Morningstar Value ETF
The Vanguard Morningstar Value ETF (NYSEMKT: VTV) is the largest value-oriented exchange-traded fund (ETF) in the world, with $188 billion in net assets. Its low expense ratio of 0.03% makes it an attractive option for investors seeking cost-effective exposure to leading value stocks. However, the ETF has a significant flaw that can be addressed by a more modern and nuanced approach to value investing.
The Problem with the Vanguard Value ETF
The Vanguard Value ETF tracks the Morningstar U.S. Large Cap Value index, which divides mega-cap and large-cap stocks into two baskets. The Growth ETF, on the other hand, tracks the Morningstar U.S. Large Cap Growth index, with no crossover between the two ETFs. This means that there are plenty of stocks in the Growth ETF that used to grow much faster than they are today, and former value stocks in the Value ETF that many investors would now consider growth stocks.
The issue with the Vanguard Value ETF is that it oversimplifies the classification of stocks as purely growth or value. This is particularly evident in the case of mature tech companies like Apple and Amazon, which have evolved into hybrids of growth and value. The ETF has zero exposure to these stocks, which can be considered consumer-staples companies or essential services for many enterprises.
Introducing the Vanguard Russell 1000 Value ETF
The Vanguard Russell 1000 Value ETF (NASDAQ: VONV) tracks the Russell 1000 Value index, which is managed by FTSE Russell, a subsidiary of the London Stock Exchange Group. The Russell 1000 is a broader index that includes smaller large-cap and mid-cap stocks, and it undergoes semi-annual reconstitution. The index weights components by growth and value, with roughly half of the market cap going into the growth index and the other half into the value index.
The Vanguard Russell 1000 Value ETF is an excellent buy for value investors who agree with FTSE Russell's methodology that mature tech companies can be split between growth and value indexes rather than solely being included in growth indexes. The ETF has a mere 0.06% expense ratio, which is just $6 for every $10,000 invested.
Why the Vanguard Russell 1000 Value ETF is a Better Representation of Value Investing
The Vanguard Russell 1000 Value ETF is a much better modern-day representation of value investing than the Vanguard Value ETF. The ETF's split weighting system recognizes that mature tech companies like Apple and Amazon have evolved into hybrids of growth and value. The ETF adjusts for how these businesses have matured into essential services for many enterprises, whereas the Vanguard Value ETF has zero exposure to these stocks.
The semi-annual reconstitution ensures that the ETF stays up to date with evolving investment theses. For example, Alphabet's entire market cap is currently in the Russell 1000 Growth index, but it could become a split-market-cap candidate like Amazon, Apple, and Microsoft.
What to Watch Next
Value investors who are looking for a more nuanced approach to value investing should consider the Vanguard Russell 1000 Value ETF. The ETF's split weighting system and semi-annual reconstitution make it a better representation of value investing in the modern era. As the investment landscape continues to evolve, it's essential to stay up to date with the latest developments and consider alternative approaches to value investing.
Conclusion
The Vanguard Morningstar Value ETF has a significant flaw that can be addressed by a more modern and nuanced approach to value investing. The Vanguard Russell 1000 Value ETF is an excellent buy for value investors who agree with FTSE Russell's methodology that mature tech companies can be split between growth and value indexes. With its low expense ratio and split weighting system, the Vanguard Russell 1000 Value ETF is a much better representation of value investing in the modern era.
