What Are Value ETFs?
Value ETFs hold stocks that appear undervalued relative to their fundamental measures like earnings, book value, and dividends. The philosophy traces back to Benjamin Graham and David Dodd, whose principles inspired Warren Buffett and generations of successful investors. Value ETFs bring this time-tested approach to the masses in a low-cost, diversified package.
The core idea is simple: buy good companies when the market underprices them. Over time, the market recognizes the true value and the stock price rises to reflect it. Value ETFs automate this process using quantitative screens that identify stocks trading below their intrinsic worth. Explore all available options on our value ETF page.
Value stocks tend to be mature, profitable companies in sectors like financials, energy, healthcare, and industrials. They often pay higher dividends than growth stocks because the companies generate more cash than they need for expansion.
How Value ETFs Identify Undervalued Stocks
Value ETFs use financial ratios to score stocks on their value characteristics. The most common metrics include:
Price-to-earnings (P/E) ratio: A low P/E suggests the market is paying less per dollar of earnings. Price-to-book (P/B) ratio: A low P/B indicates the stock trades near or below the value of the company's net assets. Dividend yield: Higher yields often indicate value stocks, since the stock price is low relative to the dividend payment. Price-to-sales (P/S) ratio: A low P/S can identify companies with stable revenue that the market is underpricing.
Different index providers combine these metrics differently. The CRSP Value Index used by VTV looks at price-to-book, forward P/E, historic P/E, dividend yield, and price-to-sales. The Russell Value Index used by IWD relies primarily on price-to-book and I/B/E/S forecast measures.
Top Value ETFs Compared
VTV — Vanguard Value ETF
VTV tracks the CRSP US Large Cap Value Index, holding about 340 stocks at just 0.04%. It provides broad value exposure across sectors, with heavy weights in financials, healthcare, and industrials. VTV is the most popular and cost-efficient large-cap value ETF.
IWD — iShares Russell 1000 Value ETF
IWD tracks the Russell 1000 Value Index with about 850 holdings at 0.19%. Its broader holdings and different methodology result in a portfolio that includes more mid-cap value stocks than VTV. IWD captures a wider swath of the value universe.
SCHV — Schwab U.S. Large-Cap Value ETF
SCHV tracks the Dow Jones U.S. Large-Cap Value Total Stock Market Index at 0.04%, matching VTV's ultra-low cost. It holds about 350 stocks with a similar sector composition. SCHV is an excellent alternative for Schwab customers or anyone seeking low-cost value exposure.
The Value Premium: Does Value Outperform?
Academic research by Eugene Fama and Kenneth French identified a persistent value premium — value stocks have historically outperformed growth stocks over long periods. This was one of the most robust findings in financial economics and inspired the creation of value-focused funds.
However, the 2010s tested this thesis severely. Growth stocks dominated for over a decade, leading some to question whether the value premium had disappeared. Value stocks then surged in 2022 as rising interest rates punished high-growth names.
The truth is likely that the value premium still exists but is cyclical and unreliable over shorter periods. Value requires patience — sometimes a decade or more of patience. Investors who held value ETFs through the lean 2010s were rewarded with strong relative performance beginning in late 2021.
Value ETFs and Dividends
One advantage of value ETFs is their higher dividend yield compared to growth funds. VTV typically yields 2.5-3.0%, compared to about 0.5% for VUG. This income can be meaningful for retirees or investors seeking cash flow.
Value stocks pay more because they are mature businesses with stable cash flows. They generate more profit than they need for growth, so they return cash to shareholders. This also provides a floor on returns — even if the stock price stagnates, you collect dividends while waiting for the market to recognize the value.
For investors focused specifically on dividends, dedicated dividend ETFs like SCHD may be even better choices. But value ETFs provide a natural blend of income and capital appreciation potential.
Building a Value ETF Portfolio
The simplest value strategy uses VTV as a core value allocation alongside a growth ETF and a bond ETF. A 50/50 split between VTV and VUG provides balanced style exposure that benefits from whichever style is currently in favor.
Value investors who want deeper exposure can complement a broad value ETF with sector-specific value plays. Financial sector ETFs and energy ETFs are natural value-oriented sectors that can amplify the value tilt. Adding international value exposure through funds like EFV provides global diversification.
Compare value ETFs on our ETF screener to find the right combination for your portfolio.
