Is Vanguard’s S&P 500 Value ETF A Buy, Sell, Or Hold? | VOOV

Value stocks have been doing marginally better compared to previous years, but they’ve still failed to narrow the gap. Vanguard’s S&P 500 Value ETF (NYSEARCA:VOOV) is up 20% over the past year, which is good. However, most stocks that spring to mind have done twice as well, or even better. If the broader stock market does well, value stocks doing well doesn’t mean it’s making a comeback.

I still wouldn’t be too sour on value, because value often comes with safety. If you want to add ballast to your portfolio or diversify away from AI, value ETFs can be a good way to do so. The issue is there are dozens of them in this market. VOOV is one of the more popular ones, and it has its own pros and cons.

What VOOV does

This is a boring, passive ETF that charges you a low expense ratio at 0.07% and filters stocks using their valuation ratios. If a stock has a high book value-to-price ratio or a high PE/PS, these stocks are kicked out. Those stocks that trade cheaper are included instead, and it also avoids value traps by using the S&P 500 as its main benchmark.

When someone says “value” you likely expect it to have cheap consumer staples, retail stocks, utilities, or maybe healthcare names. VOOV does not chase those names. Tech stocks constitute 21.4% of its portfolio, with financials at 14.8%. In fact, the largest holding is Apple (NASDAQ:AAPL | AAPL Price Prediction) at 7.88%, which does throw a wrench into any tech diversification ideas.

There’s also the dividend. You’re getting paid a minuscule 1.66% dividend yield. That’s slightly better than the benchmark S&P 500, but no one’s buying VOOV for the dividends. Most investors are buying this because they aren’t invested in value and want some exposure to it.

VOOV does not give you enough value or diversification

I mentioned before that financial and tech stocks together constitute a good 35% of this portfolio. It’s not a bad thing in any aspect, since it’s foolish to assume that both the tech and finance sectors are devoid of value. The main issue is that the top two holdings are mega-cap tech in a value portfolio, and the broader strategy ends up being too reliant on the S&P 500.

VOOV tracks the S&P 500 Value Index, which in turn pulls in stocks from the S&P 500. This value index holds ~440 stocks, which is most of the S&P 500. You’re basically holding a rearranged and rebalanced S&P 500.

It makes little sense to hold this for diversification or value if you already hold the S&P 500. You’ll get overlapping exposure to AAPL, plus whatever other S&P 500 stocks VOOV holds. I’m not saying that other value stocks don’t overlap with the S&P 500, but this is one ETF where you’re going to get the least diversification if you already hold the S&P 500.

VOOV is not a buy. Look into these ETFs instead

If your primary aim is to hedge against tech, forget VOOV and buy the Vanguard Consumer Staples ETF (NYSEARCA:VDC). Yes, VDC has terribly underperformed during this tech rally and is only up 42% in the past five years, but this is exactly what you need if you want to make sure there’s something in your portfolio that creeps up but doesn’t plummet during a tech downturn.

However, if you want to keep up or outperform VOOV with similar or better safety, just buy the Schwab US Dividend Equity ETF (NYSEARCA:SCHD). It even has 0.01% lower fees to sweeten the deal, and the PE ratio on this ETF is ironically lower than the value ETF. VOOV’s PE ratio is nearly 21x, whereas SCHD’s is less than 18x. On top of that, the dividend yield is double that of VOOV.

VOOV is only good if you’re forced to buy it. The market has far better options.