iShares and Vanguard are the biggest players in the ETF universe, so it makes sense that their respective value ETFs would do such a good job of getting investors to buy shares of their funds. Vanguard puts more emphasis on reducing costs to the absolute maximum, with expense ratios that are less than a third what iShares typically charges. iShares tends to stress ease of tradability of its ETF shares, and its funds tend to be among the most liquid in daily trading. For long-term investors, that factor isn't quite as important, but for those who trade ETF shares frequently, the resulting reduction in trade-related expenses can make a material difference in long-term performance.
You'll see below that each of the three funds that iShares and Vanguard put up on this list addresses different sizes of companies. Their recent returns don't necessarily reflect much difference across large-cap, mid-cap, and small-cap value stocks, but your investment strategy might still call for allocations across stocks of different market capitalizations in order to be better diversified when their relative returns diverge in the future.
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1. iShares Russell 1000 Value
The iShares Russell 1000 Value ETF is the largest value ETF available, edging out its Vanguard counterpart. The Russell 1000 index includes the top 1,000 large-cap and mid-cap stocks in the U.S. stock market, and the iShares ETF invests in a subset of that list, with the Russell 1000 Value index focusing on the companies with relatively lower price-to-book ratios, or how share price relates to a company's book value, and lower forecast growth than their peers in the broader Russell 1000. The ETF holds about 700 stocks currently.
The ETF's performance has been solid, with the ETF producing average annual returns of 7.6% over the past decade. Because many of the stocks that the ETF owns pay dividends, investors currently enjoy a yield of about 2.25% on their investment, which can provide much-needed income for those who need to draw cash from their portfolios.
The ETF's portfolio has definite areas of concentration, with more than a quarter of its assets invested in the financial sector. Healthcare and energy stocks make up another quarter of the fund's assets under management, and the remaining half is split fairly evenly across the remaining sectors of the market.
2. Vanguard Value
The Vanguard Value ETF falls just short of its iShares counterpart's assets under management. It tracks a different index, the CRSP U.S. Large Cap Value index, which includes more than 300 stocks among its component companies. In developing the index, CRSP looks at relationships between share price and book value, forward and historical earnings multiples , dividend yields, and price-to-sales ratios, or how the stock price relates to annual revenue. The result is a narrower portfolio than the Russell 1000 Value Index that puts more emphasis on truly large-cap companies.
That methodology has led to slightly better performance over the long run. Over the past decade, the Vanguard ETF has returned an average of 8.4% each year. The ETF also sports a slightly higher income yield than its iShares counterpart, with a current yield of almost 2.5%.
You'll find the same concentration in financial stocks within the Vanguard ETF that the iShares ETF has, but the big difference is in the sizable 15% allocation to technology stocks that the Vanguard fund holds. That's been a large contributor to relative performance in recent years, and similar allocations to most other sectors make tech the standout for the ETF.
3. Vanguard Small-Cap Value
Small companies can be good values, too, and the Vanguard Small-Cap Value ETF seeks to identify those stocks. The CRSP U.S. Small Cap Value index looks at a much larger universe of potential candidates, and the Vanguard fund ends up selecting almost 900 different small-cap stocks for its portfolio. That added diversification is helpful, given the higher risk that small companies have compared to more well-established large companies.
Small caps have outperformed their larger counterparts over the past decade as well. The Vanguard Small-Cap Value ETF has produced average annual returns of 10.3% over the past decade. Small-cap stocks don't tend to have as much capacity to pay dividends, however, and that's a big part of why the ETF has a yield of below 2%.
From an industry standpoint, the ETF's holdings are even more concentrated than what you'll see in the large-cap realm. Financials and industrial stocks make up more than half of the ETF's assets, and consumer stocks and technology together add another 25%. Again, Vanguard's willingness to embrace tech stocks has helped performance, and that shows up even more clearly in the small-cap space.
4. iShares Russell Mid-Cap Value
The iShares Russell Mid-Cap Value ETF looks to split the difference between small and large stocks, focusing instead on those companies in the middle of the size spectrum. Russell looks at the 1,000 largest stocks in the market, which make up its Russell 1000 Index, and then cuts out the top 200. That leaves 800 stocks that it considers midcaps, and Russell then applies the same tests to determine which stocks meet its value criteria. The iShares ETF invests in nearly 600 of those stocks.
Performance has been superior to the broader large-cap offering from iShares, with average annual returns of 9.6% over the past 10 years representing a big boost. Mid-caps also have a reasonable capacity to pay out dividends, and the ETF's current yield is right around the 2% mark.
One interesting aspect of the ETF is that its portfolio isn't quite as concentrated as in other iShares value ETFs. Financials make up just 20% of the fund, with real estate, industrials, consumer discretionary stocks, and utilities all getting 10% to 13% allocations of fund assets. That arguably gives the fund greater diversification, and it also reflects the greater number of places where investors can find value in the mid-cap realm right now.
5. iShares Russell 2000 Value
iShares gets its small-cap value stock exposure by tracking the Russell 2000 Value Index, which includes that portion of the 2,000 next-smaller companies beyond the Russell 1000 that meet the same value characteristics that Russell looks for in all of its value-based benchmarks. That gives the ETF exposure to almost 1,400 small-cap value stocks, dwarfing the holdings of its Vanguard counterpart.
Performance has been solid, but it doesn't match up to what Vanguard has achieved. Average annual returns have been about 8.4% over the past decade. Yields of 1.75% reflect the lower payout capacity that many smaller companies have to make dividend distributions to their shareholders.
The iShares ETF has about 30% of its assets in financial stocks, but beyond that, its portfolio is slightly more balanced than its Vanguard counterpart's holdings. Industrials, consumer discretionary, real estate, and technology each have close to 10% allocations of fund assets, and you'll also find modest exposure of roughly 5% to 7% in energy, healthcare, utilities, and materials stocks.
6. Vanguard Mid-Cap Value
Finally, Vanguard weighs in with a mid-cap offering of its own. It tracks the CRSP U.S. Mid Cap Value index, which includes 200 mid-sized companies that meet the same value characteristics that CRSP uses in the large-cap space as described above.
Performance for the fund has been extremely strong. Over the past decade, average annual returns have been about 10.6%, outperforming small- and large-cap stocks in the space. An income yield of 2.2% also give the Vanguard ETF a slight advantage over its iShares Mid-Cap Value counterpart.
Financials carry the same overweight as you'll see in other Vanguard funds, with consumer stocks also getting about a 25% allocation within the fund. Industrials, tech stocks, utilities, and energy companies also have substantial presence within the ETF.
Picking the right value ETF
Most investors should look for a diversified approach in their investing, and that extends even to the ETF level. Choosing any one of these ETFs is a reasonable option, but the better choice is to allocate percentages to each market-cap range in order to balance greater opportunities from smaller companies against the higher risk they can sometimes pose. With their cost and recent performance advantages, the Vanguard value ETFs on this list could offer better long-term results for investors than their iShares rivals.
This article originally appeared on The Motley Fool.