VONV appears solid, but VTV could be a better investment vehicle

Vanguard Russell 1000 Value Index Fund ETF shares (NASDAQ:VONV), an ETF with a broader focus on the value category, appears to be in a comfortable position to deliver solid risk-adjusted returns over the short to long term. VONV’s potential to deliver risk-adjusted returns is attributed to its diversified portfolio, its improved fundamental outlook and its favorable valuations. The value category could also benefit from the potential rotation out of growth and technology stocks due to the increasing risk of a correction. In addition to VONV, there are also other investment options in the value space such as Vanguard Value Index Fund ETF Shares (VTV) also appears attractive. I start coverage of VONV with a Buy rating. I recently gave a Buy rating to VTV, anticipatory Rising earnings are ahead.

Outlook for value category improves thanks to strong earnings growth and favorable valuations

With a total return of almost 26% since the beginning The performance of the Vanguard Russell 1000 Value Index Fund ETF shares is solid through 2023 given the low risk factor. Nevertheless, performance is expected to improve significantly in the second half of the year and in 2025 due to the strengthening of the value category’s fundamentals.

Earnings growth may be the most important fundamental driver of value stocks’ performance. Over the past year and a half, the S&P 500’s earnings and share price growth have been driven primarily by technology stocks. However, this trend is likely to change from quarter to quarter, as mega-cap growth stocks’ earnings are likely to cool while value-heavy sectors are expected to deliver double-digit growth.

For example, the utilities sector reported earnings growth of 19% in the second quarter of 2024, while the financials and healthcare sectors surprised investors with earnings growth of 17%. Defensive consumer goods stocks also posted significant gains, while large-cap industrials beat expectations and raised their full-year forecasts. The earnings growth trend is expected to continue throughout 2024 and strengthen in the following year. Aside from utilities, most value-heavy sectors reported single-digit percentage negative growth last year.

In addition to earnings growth, the value category trades at cheap valuations. The category currently trades at just 16 times forward earnings, which is below the growth category’s forward P/E of 26, the S&P 500’s 21 times, and the technology sector’s 29 times. The low forward P/E of value stocks is due to their robust earnings growth prospects and a recent share price underperformance relative to the broader market index. In addition, a combination of strong earnings growth potential and cheap valuation makes value ETFs an attractive option for rotating out of overvalued growth and technology categories.

VONV is a good option for investors with low risk tolerance

The Vanguard Russell 1000 Value Index Fund ETF shares could be a solid investment option for investors with low risk appetite due to their diversification factor and the improving outlook for the value category. VONV’s portfolio is significantly diversified with more than 870 stock holdings across all 11 sectors. The financials, healthcare, and industrials sectors account for 20%, 15%, and 14% of the total portfolio, respectively. The energy, utilities, consumer discretionary, consumer discretionary, and real estate sectors also account for more than 35% of the portfolio weight. VONV’s portfolio also offers exposure to the technology sector with nearly 10% of the portfolio weight. The average earnings growth rate has been about 12.2% over the past five years. The ETF has a five-year beta of 0.86%, which means low volatility compared to the S&P 500 index.

Concentration on single or few stocks is low. The top 10 holdings make up just 17% of the total portfolio and include established stocks such as Berkshire Hathaway (BRK.B), JPMorgan Chase (JPM), Exxon Mobil (QOM), UnitedHealth (UNH), Walmart (WMT), Procter & Gamble (PG), and a few others. The rest of the portfolio is made up of large, mid, and small caps. Additionally, since many value stocks offer dividends, VONV’s dividend yield is about 2%, which is above the S&P 500 average of 1.29%. The average annual dividend increase over the past five years has been about 9%.

The ETF received a Buy rating with a Quant Score of 3.76. Its Momentum Score has improved over the past three months due to the improved outlook for the value category. With earnings growth prospects continuing to improve and valuations still looking cheap, VONV’s price momentum should accelerate in the coming months. Its expense ratio of 0.08% received an A+ grade. An expense factor is important because it can make a significant difference in total returns over the long term. Its high dividend yield and healthy dividend growth enabled it to earn a B on Dividend Factor. VONV’s B+ on Risk Factor indicates low volatility, higher portfolio diversification, and low standard deviation compared to the median of all ETFs.

VTV could be an ETF worth considering

Although the diversification factor improves stability and limits volatility, significant diversification can also reduce the ETF’s potential to benefit from the uptrend. Vanguard Value Index Fund ETF shares could be one of the best investment options for investors who want to take full advantage of the improving fundamentals. I prefer VTV because of its better portfolio structure.

In contrast to the significant diversification and broader exposure to the value category that VONV offers, the Vanguard Value Index Fund ETF Shares provide targeted exposure. They track the performance of the CRSP US Large Cap Value Index, which is comprised of 345 large value stocks. The median market capitalization of its portfolio holdings is $129 billion, compared to $84 billion for VONV. I believe the largest companies in the value category are in a better position to benefit from improving fundamentals. Large caps generally have well-established business models, strong investment potential, solid earnings growth prospects, and the ability to generate significant amounts in the form of cash returns. This is also reflected in the recent performance of VTV’s share price, dividend, and earnings growth. VTV has achieved a 14% share price increase year-to-date, compared to a 12.5% ​​increase for VONV. In addition, it offers a dividend yield of 2.32% with a three-year average dividend growth of over 10%. The average earnings growth of portfolio holdings over five years of 12.8 percent is also higher than that of VONV at 12.2 percent.

According to Seeking Alpha’s Quant Rating, VTV beats VONV on most quant factors. Therefore, the ETF received a Quant Score of 4.14 with a Buy rating, versus VONV’s 3.76. It received high marks for Momentum, Risk, Dividend and Liquidity factors. VTV’s negative A grade on a risk factor compared to VONV’s B+ grade indicates downside protection.

Diploma

The value category is likely to shine in the coming quarters due to a combination of earnings growth and cheap valuation. Numerous value-oriented sectors such as healthcare, utilities, financials, and industrials are expected to deliver high single-digit to double-digit earnings growth in the coming quarters to support their share price and dividend yields. Moreover, the robust fundamentals could also make the category a beneficiary of the rotation out of overvalued technology stocks. Nevertheless, it is crucial to select the right investment option to capture potential gains. Vanguard Russell 1000 Value Index Fund ETF Shares seems to be a good option for investors with low risk tolerance, while VTV has greater potential to benefit from improving fundamentals.