VONV looks solid, but VTV might be a better investment vehicle

Vanguard Russell 1000 Value Index Fund Shares ETF (NASDAQ: VONV), an ETF focused on a broader value category, seems comfortably positioned to deliver solid risk-adjusted returns over the short or long term. VONV’s potential to generate risk-adjusted returns is attributed its diversified portfolio, improved fundamental outlook and cheap valuations. The value category may also benefit from the potential rotation of growth and technology stocks due to increased correction risk. In addition to VONV, other investment options in the value space such as the Vanguard Value Index Fund Shares ETF (VTV) also looks attractive. I initiate coverage of VONV with a buy rating. We recently gave a buy rating on VTV, anticipating the support comes back before.

The outlook for the value category has improved amid strong earnings growth and cheap valuations

With total returns of almost 26% since the beginning since 2023, Vanguard Russell 1000 Value Index Fund Shares ETF performance is solid given a low risk factor. However, its performance in the second half and in 2025 is likely to improve significantly due to strengthening fundamentals of the value category.

Earnings growth could be the biggest fundamentals in fueling the performance of value stocks. Over the past year and a half, the S&P 500’s gains and price gains have been driven primarily by technology stocks. However, this trend is likely to change quarterly as gains in megacap growth stocks cool, while high-value sectors are poised to deliver double-digit growth.

For example, the utilities sector reported a 19% increase in earnings in the second quarter of 2024, while the financial and healthcare sectors stunned investors with a 17% increase in earnings. Defensive consumer stocks also made significant gains, while large-cap industrials beat expectations and raised their full-year outlook. The earnings growth trend is expected to continue throughout 2024 and is anticipated to pick up in the following year. Besides utilities, most high-value sectors reported negative single-digit percentage growth last year.

In addition to rising earnings, the value category is trading at cheap valuations. The category currently trades around just 16x forward earnings, down from the growth category’s forward PE of 26x, the S&P 500’s 21x and the tech sector’s 29x. Value stocks’ low forward PE is attributed to their robust earnings growth outlook and recent share price underperformance relative to the broader market index. Additionally, a combination of strong earnings growth power and cheap valuation make value ETFs an attractive option for rotation in 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 a low risk tolerance due to its diversification factor and improved outlook for value categories. VONV’s portfolio is significantly diversified, with over 870 stocks in all 11 sectors. Financials, healthcare and industrials account for 20%, 15% and 14% of the total portfolio respectively. The energy, utilities, consumer defensive, consumer cyclical and real estate sectors also account for more than 35% of its portfolio weight. VONV’s portfolio also offers exposure to the technology sector, with nearly 10% of the portfolio weighting. The average earnings growth rate has been around 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.

The level of concentration in a single stock or a few stocks is low. Its top 10 holdings represent just 17% of its total portfolio and include well-established stocks such as Berkshire Hathaway ( BRK.B ), JPMorgan Chase ( JPM ), Exxon Mobil ( QOM ), UnitedHealth ( UNH ), Walmart ( WMT ), Procter & Gamble (PG) and others. The rest of his portfolio is comprised of large, mid and small caps. Furthermore, because a large number of value stocks also offer dividends, VONV’s dividend yield is around 2%, above the S&P 500 average of 1.29%. Its dividend growth CAGR over the past five years has been around 9%.

The ETF has earned a buy rating with a quant score of 3.76. Its momentum score has improved over the past three months due to the improving outlook for the value category. As the outlook for earnings growth continues to improve and valuations still look cheap, VONV’s share price momentum is likely to accelerate in the coming months. Its expense ratio of 0.08% received an A-plus grade. An expense factor is important because it can make a significant difference in your overall long-term return. Its high dividend yield and healthy dividend growth have earned it a B grade on a dividend factor. VONV’s B-plus grade on one risk factor indicates low volatility, greater portfolio diversification and low standard deviation compared to the median of all ETFs.

VTV might be an ETF worth considering

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

Unlike the significant diversification and broader exposure to the value category offered by VONV, Vanguard Value Index Fund ETF Shares offers targeted exposure. It tracks the performance of the CRSP US Large Cap Value Index, which is composed of 345 large-cap stocks. The average market capitalization of its portfolio is $129 billion, compared to VONV’s $84 billion. I think the largest companies in the value category are in a better position to capitalize on improving fundamentals. Large caps generally have well-established business models, strong investment potential, solid earnings growth prospects, and the ability to return significant amounts in cash income. This is also reflected in the recent performance of VTV’s share price, dividends and earnings. VTV has generated a 14% year-to-date price gain compared to VONV’s 12.5% ​​gain. Additionally, it offers a dividend yield of 2.32% with a three-year dividend growth CAGR of over 10%. Its portfolio’s five-year average earnings growth of 12.8% is also higher than VONV’s 12.2%.

According to Seeking Alpha’s quant rating, VTV outperforms VONV on most quant factors. The ETF therefore earned a quant score of 4.14 with a buy rating, up from VONV 3.76. It received high marks on the momentum, risk, dividend and liquidity factors. VTV’s A-negative grade for a risk factor compared with VONV’s B-plus grade indicates negative protection.

Conclusion

The value category is likely to shine in the coming quarters thanks to a combination of earnings growth and cheap valuation. Numerous high-value sectors such as healthcare, utilities, financials and industrials are poised to generate high single- to double-digit percentage earnings growth in the coming quarters to support stock prices and dividend yields. Additionally, robust fundamentals could also make the category a beneficiary of the overvalued tech stock rotation. Despite this, it is essential to select the right investment option to capitalize on the potential gains. Vanguard Russell 1000 Value Index Fund ETF shares appear to be a good option for investors with a low risk tolerance, while VTV has more potential to benefit from improved fundamentals.