There are benefits to investing in stocks that have reasonable multiples and aren’t as dependent on future earnings growth to justify their valuations.
The S&P 500 is still up on the year, but it has pulled back in April. Investors who are worried about further downward momentum have come to the right place. Exchange-traded funds (ETFs) can be an excellent way to achieve diversification and peace of mind during a sell-off — knowing that you have exposure to multiple different industries and themes.
Here’s why the Vanguard Value ETF (VTV -0.06%) is a good long-term investment and resilient to a stock market sell-off.
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Lower risk and lower potential reward
The Vanguard Value ETF is massive — with over $170 billion in net assets, 340 stock holdings, and a mere 0.04% expense ratio.
The median market capitalization of each stock is $126.8 billion, so the fund mainly targets large-cap value stocks. The average price-to-earnings (P/E) ratio of a stock in the ETF is 19.3, and the price-to-book (P/B) is 2.8 compared to an average P/E ratio of 26.1 and P/B of 4.5 in the Vanguard S&P 500 ETF (VOO 1.00%). What’s more, the yield of the Vanguard Value ETF is a much better 2.4% compared to 1.3% for the Vanguard S&P 500 ETF.
When we look at the sector breakdowns for each fund, it’s easy to see why the Vanguard Value ETF has a higher yield and lower multiple than the Vanguard S&P 500 ETF.
|
Sector |
Vanguard Value ETF |
Vanguard S&P 500 ETF |
|---|---|---|
|
Financials |
19.9% |
13.1% |
|
Healthcare |
16.9% |
12.4% |
|
Industrials |
15.3% |
8.8% |
|
Technology and Communications |
13.2% |
38.5% |
|
Consumer Staples |
9.4% |
6% |
|
Consumer Discretionary |
8.1% |
10.3% |
|
Energy |
7.2% |
4% |
|
Utilities |
5.1% |
2.2% |
|
Real Estate |
3% |
2.3% |
|
Basic Materials |
1.9% |
2.4% |
Data source: Vanguard.
The Value ETF has higher weightings in financials, healthcare, industrials, consumer staples, energy, utilities, and real estate. These sectors leave out many flashy growth stocks, including all of the “Magnificent Seven.”
All investing decisions involve some level of compromise. With the Vanguard Value ETF, investors are leaving out a ton of growth potential in exchange for higher income and better valuations based on trailing earnings. In other words, these companies are proven and their value is based more on what they are doing today than what they will do in the future. This level of certainty tends to play well when the market sells off and investors gravitate toward proven winners and away from potential winners.
Going on autopilot
I was watching the new show Franklin on Apple TV+ the other day, and there was a quote that got my attention. Benjamin Franklin is having a picnic in a park in France. The person he is with makes a bold claim about the American Revolutionary War, and Franklin responds with, “[That’s] an easy thing to say on a sunny day in France.” In other words, there’s nothing to lose by making a claim when you’re removed from the danger.
Regarding investing, it’s easy to say a stock that is going up could go higher or ride the wave of a thriving bull market. But it is much harder to stand your ground against the riptide of a ferocious bear market, let alone make level-headed decisions when stock prices are plunging.
One of the simplest ways to save yourself some trouble during a sell-off is to have a list of companies or funds you have high conviction in and believe in long-term. The investment thesis isn’t likely to change just because equities are selling off, so you can be confident that putting capital to work in these ideas is a good long-term move even if those equities continue falling in the short-term.
A balanced choice for patient investors
The Vanguard Value ETF is a great choice if you’re looking to go on autopilot and are searching for a passive yet effective choice to plug and play even when your screen is flashing red. It’s chock-full of industry-leading blue chip stocks. However, investors should understand that even value stocks can go down in a sell-off — just usually less so than growth stocks.
Having a long-term time horizon and investing through periods of volatility charts a path toward compounding wealth over time. However, if you already own a lot of growth stocks or just feel like you want to put new capital to work in something safer, then the Vanguard Value ETF is an excellent choice because it allows you to increase your participation in the market while also collecting passive income without the need to sell stocks.
Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Vanguard Index Funds-Vanguard Value ETF, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
