Value investing is about finding stocks that the market overlooks and undervalues. Companies that fit the mold normally earn modest valuations because of their cloudy outlooks, poor fundamentals, lethargic growth, or some combination of those factors. They don’t hang on the clearance rack by accident.
But performance relative to expectations is what counts. Cheap stocks face a low hurdle to outperform, and value funds can fare well by finding the ones that can clear it.
The logic is sound, but value stocks have slumped for some time. Over the past decade, the Morningstar U.S. Market Broad Value Index trailed its growth counterpart by about 2.5 percentage points per year. Value investors can be forgiven for getting antsy. But for the patient among them—or others eager to shop the deals—these three ETFs are worth a closer look.
3 Great Value ETFs for 2024
- Schwab Fundamental US Large Company ETF FNDX
- Avantis US Small Cap Value ETF AVUV
- Schwab International Dividend Equity ETF SCHY
Schwab Fundamental US Large Company ETF FNDX is a well-diversified strategy that isn’t afraid to go against the grain. It earns a Morningstar Medalist Rating of Silver.
This index strategy sweeps in the complete U.S. large-cap market and weights stocks by fundamental measure of size, like sales and cash flow, instead of their valuation. So when the fund rebalances, it effectively doubles down on declining stocks and trims exposure to on those on the rise. This embodies the “buy low, sell high” philosophy and gives the fund its value tilt.
This fund has sidestepped the concentration that has emerged for indexes like the S&P 500 or Russell 1000. It invests in roughly the same stocks as those cap-weighted benchmarks, but it spreads the wealth more evenly. In other words, FNDX curbs concentration and price risk while still holding the market’s best performers.
Value’s woes have left this fund behind the broad market for most of its life, but it has dominated its peers in the large value Morningstar Category. Over the past 10 years, its 11.3% annual return ranked within the top 5% of that peer group.
Next up is Avantis US Small Cap Value ETF AVUV, which offers a well-diversified portfolio of cheap but high-quality small-cap stocks. That rare balance earns it a Silver Morningstar Medalist Rating.
The risk in value investing is sticking with low-quality companies whose cheap valuations are a real signal of poor future performance—not a rare chance to buy low. This small-cap strategy avoids that pitfall by targeting stocks with the best combination of profitability and value characteristics. Emphasizing both features helps the fund identify companies that are poised to exceed their humble expectations. And mitigating expenses only adds to this fund’s appeal. Its portfolio managers trade stocks efficiently and charge a low fee—a combination that bodes well for investors.
This fund is not without risks. It excludes real estate and utilities, leaving it with a large position in the cyclical sectors. That’s led to above-average volatility, but investors have been compensated for bearing it: AVUV ranked within the small-value category’s best decile since its launch in September 2019.
At the end of February 2024, stock valuations looked cheaper overseas than in the U.S.. So, let’s look abroad for today’s final ETF: Schwab International Dividend Equity ETF SCHY, which earns a Silver Morningstar Medalist Rating.
This index strategy targets foreign stocks that have paid cash dividends for at least 10 years straight. Companies that meet that strict requirement receive a score that embodies their cash flow, profitability, yield, and dividend growth. After filtering the universe for volatility and applying turnover buffers, the fund admits the 100 stocks with the best overall ratings and weights them by market cap. Balancing yield and fundamental considerations loads this portfolio with high-quality franchises while retaining its value posture.
Keeping just 100 stocks on hand makes this a relatively narrow portfolio. However, it caps exposure to individual companies, sectors, and emerging markets—all thoughtful measures that dial back risk. Plus, this fund charges a paltry 0.14% fee, making it one of the cheapest options in the foreign large-value category.
The author or authors do not own shares in any securities mentioned in this article.
