VONV Appears Solid, But VTV Could Be A Better Investment Vehicle

Vanguard Russell 1000 Value Index Fund ETF Shares (NASDAQ:VONV), a broader value category-focused ETF, appears in a comfortable position to offer solid risk-adjusted returns in the near to long term. VONV’s potential to generate risk-adjusted returns is attributed to its diversified portfolio, improved fundamental outlook and cheap valuations. The value category may also likely benefit from the potential rotation out of growth and tech stocks because of increasing risk of correction. Besides VONV, other investment options in the value space such as Vanguard Value Index Fund ETF Shares (VTV) also appears attractive. I initiate coverage of VONV with a buy rating. I recently provided a buy rating on VTV, anticipating bolstering returns ahead.

Value Category Outlook Improved Amid Earnings Growth Power And Cheap Valuations

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

Earnings growth could be the biggest fundamental factors in fuelling value stocks performance. In the last one and a half year, the S&P 500 earnings and price growth was mainly driven by tech stocks. However, this trend is likely to change quarter over quarter because mega-cap growth stocks earnings are likely to cool while value-heavy sectors are poised to generate double-digit growth.

For instance, the utilities sector reported 19% earnings growth in the second quarter of 2024 while the financials and healthcare sectors stunned investors with a 17% earnings growth. Consumer defensive stocks also earned significant profits, while large cap industrials companies topped expectations and lifted their full-year outlook. The earnings growth trend is expected to continue throughout 2024 and is anticipated to amplify in a following year. Besides the utilities, most of the value-heavy sectors reported a single-digit percentage of negative growth last year.

In addition to earnings growth, the value category is trading at cheap valuations. The category is currently trading around only 16x forward earnings, down from the growth category’s forward PE of 26x, S&P 500’s 21x and tech sector’s 29x. The value stock’s low forward PE is attributed to their robust earnings growth outlook and a recent share price underperformance compared to the broader market index. In addition, a combination of strong earnings growth power and cheap valuation make value ETFs an attractive option for rotation out of overvalued growth and tech categories.

VONV Is A Good Option For Low-Risk Tolerance Investors

Vanguard Russell 1000 Value Index Fund ETF Shares could be a solid investment option for low-risk tolerance investors due to its diversification factor and improved value category outlook. VONV’s portfolio is significantly diversified with more than 870 stock holdings from all 11 sectors. The financials, healthcare and industrials represent 20%, 15% and 14% of the entire 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 tech sector, with nearly 10% of portfolio weight. Its average earnings growth rate was around 12.2% in 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 concentration level in a single or a few stocks is low. Its top 10 holdings account for only 17% of the overall portfolio and includes well-established stocks like Berkshire Hathaway (BRK.B), JPMorgan Chase (JPM), Exxon Mobil (QOM), UnitedHealth (UNH), Walmart (WMT), Procter & Gamble (PG) and a few others. The rest of its portfolio holdings are composed of large, mid and small caps. Moreover, as a large number of value stocks also offer dividends, VONV’s dividend yield hovers around 2%, above from the S&P 500 average of 1.29%. Its dividend growth CAGR in the past five years was around 9%.

The ETF earned buy rating with a quant score of 3.76. Its momentum score improved in the past three months because of the improving outlook for the value category. As the earnings growth outlook continues to improve and valuations still appear 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 create a significant difference in total returns over the long term. Its high dividend yield and a healthy dividend growth enabled it to earn a B-grade on a dividend factor. VONV’s B-plus grade on a risk factor indicates low volatility, higher portfolio diversification and a low standard deviation compared to the median of all ETFs.

VTV Could Be A Worth Considering ETF

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

Unlike significant diversification and broader exposure to the value category offered by VONV, Vanguard Value Index Fund ETF Shares provides a targeted exposure. It tracks the performance of the CRSP US Large Cap Value Index, which is composed of 345 large value stocks. The median market-cap of its portfolio holdings is $129 billion, compared VONV’s $84 billion. I believe 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 returns. This is also reflected in VTV’s recent share price, dividend and earnings growth performance. VTV generated a price gain of 14% year to date, compared to VONV’s 12.5% increase. Moreover, it offers a dividend yield of 2.32% with a three-year dividend CAGR growth above 10%. Its portfolio holdings’ five-year average earnings growth of 12.8% is also higher than VONV’s 12.2%.

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

Conclusion

The value category is likely to shine in the coming quarters due to a combination of earnings growth and cheap valuation. Numerous value-heavy sectors such as healthcare, utilities, financials and industrials are poised to generate high single-digit to double-digit percentage earnings growth in the coming quarters to back their share price and dividend returns. Moreover, the robust fundamentals could also make the category a beneficiary of rotation out of overvalued tech stocks. Despite that, it’s crucial to select the right investment option to capitalize on potential gains. Vanguard Russell 1000 Value Index Fund ETF Shares appears to be a good option for low-risk tolerance investors, while VTV has greater potential to benefit from improved fundamentals.