Researchers have come up with different explanations for the “value premium”, ever since Fama and French published their famous research paper in 1992, showing outperformance of value stocks over growth stocks over long term.
Further, numerous academic studies conducted since then have shown that value stocks have delivered higher returns with lower volatility compared with growth stocks over the long term in almost all the markets studied. (Read: 3 Excellent ETFs for Growing Dividends)
Does that mean that investors should ignore growth stocks? Not at all; growth stocks shine in certain market cycles and value stocks in some others. But given their proven performance over long term, value stocks and funds should be a predominant part of any ‘core’ portfolio.
Also, while some of the small cap companies have high return potential, they are mostly riskier and require frequent monitoring, and on the other hand established large cap companies with solid balance sheets and stable cash flows are less risky and thus more suitable for long term investors.
Are Cheaper Funds Better?
Expense ratios are an important factor in the return of an ETF and in the long-term, cheaper funds can significantly outperform their more expensive cousins, other things remaining the same.
The following table shows how high expanses can affect fund returns. In the example, we put $10,000 in three funds, with annual expense ratios of 0.10%, 0.50% and 1.00% respectively and assumed that all three of them returned 8% per annum.
The difference in total returns (after expenses) becomes very significant as we increase the holding period. For the purpose of simplicity of calculations, we have ignored transaction costs and taxes.
|Value after 10 years||$21,390||$20,610||$19,672|
|Value after 20 years||$45,754||$42,479||$38,697|
|Value after 30 years||$97,869||$87,550||$76,123|
We may add that expense ratio is not the only cost involved in investing in an ETF but it usually is the major cost, however investors need to look at other implicit costs too in addition to expense ratio.
Below, we have analyzed three large cap value ETFs with ultra-low expense ratios that should be considered by investors for their long-term, core portfolios.
Schwab U.S. Large-Cap Value ETF (SCHV)
SCHV provides broad exposure to large-cap U.S. stocks with value style characteristics, representing about half of the market capitalization of stocks in the Dow Jones U.S. Large Cap Total Stock Market Index.
Launched in December 2009, the fund has so far been able to attract assets worth $713.4M, which are invested in 356 holdings. With an annual fee of just 7 basis points, this product is the cheapest option in the space. Additionally, the dividend yield at 2.5% is quite attractive.
Financials (24.3%), Consumer Staples (12.2%), Energy (11.6%) and Consumer Discretionary (11.1%) are the top four sectors, the fund has invested in. With almost a quarter of the asset base invested in financials stocks, the product is likely to benefit from continued outperformance by the sector.
Exxon, GE, P&G, Chevron and Wells Fargo are among the top holdings. With top ten holdings accounting for just about 27% of the asset base, the fund is pretty well diversified.