Value exchange-traded funds simplify the challenging, research-intensive process of finding stocks that are underpriced by markets. Value stocks trade at prices below their perceived intrinsic value, which is just another way of saying that they can be great bargains.
Despite recent evidence to the contrary, value stocks have outperformed growth stocks over the long term. According to a study by Dimensional Funds, value stock returns between 1927 and 2021 averaged 4% higher than growth stock returns.
Our list of best value ETFs includes options for every type of investor, from those who adhere to a passive indexing approach to people who are itching to outperform the market. We’ve also included several international funds, since overseas stocks can be valued substantially below comparable U.S. equities.
The Best Value ETFs of August 2023
Methodology
Our selection of the best value ETFs includes both passive and active funds that employ a range of strategies to invest in undervalued stocks.
We began by screening for U.S. and international funds with silver or gold Morningstar rankings, and four- or five-star Morningstar analyst ratings. We then eliminated any funds with expense ratios above 0.69%, which provided a preliminary list of 41 options. After sorting by category, we analyzed index, factor, actively managed, small-, mid- and large-cap value funds.
The final seven picks charge below-average fees and demonstrate long-term performance above their peers. We’ve included three Vanguard passive funds and several factor funds that isolate specific characteristics that outperform market averages. Dividend lovers will find several high-yield offers, and those looking to fill an international gap in their portfolios will find two good options.
To learn more about our rating and review methodology and editorial process, check out our guide on How Forbes Advisor Rates Investing Products.
What Is Value Investing?
Everybody knows that big-ticket items like televisions and laptops always go on sale, eventually. Savvy shoppers save their money and wait for the sales, rather than paying full price right now. And that’s not a bad way to understand value investing: Buying stocks on sale, only when they’re priced at a discount, then waiting for them to rise over time to match their true value.
Our analogy only goes so far, of course. Sales come pretty often, and it’s not hard to discern both the full price for the TV you have your eye on or what sort of discount makes for a great deal. Value investing is much more challenging, and it requires plenty of research and detective work to uncover which stocks are value buys and what their “true” price should be—their so-called intrinsic value.
Value investors believe the stock market overreacts to the news and events that impact individual companies. They feel that short-term developments drive moves in stock prices that don’t always reflect a company’s long-term fundamentals. Going deep to research those fundamentals—things like P/E, P/B and book value—helps value investors understand the intrinsic value of a company and see whether the current market price is in line with that value or trading at a steep discount.
For value investing, the bigger the difference there is between a stock’s intrinsic value and its current market price, the greater the opportunity. But even then, not every value stock will see its market price rebound to match what an investor believes is its intrinsic value, making value investing a tricky proposition that’s far from a sure bet in every case.
How Do Large-Cap Value ETFs Work?
Large-cap value ETFs track an underlying index that aims to mirror the performance of a group of undervalued, large-cap stocks. While these ETFs share common characteristics, there can be significant differences between the indexes they track. For example, each index defines differently how it measures value. While the metrics vary from one index to another, most include factors such as P/E and P/B.
The ETFs on this list show a wide variance when it comes to these measures of value. For example, the average P/E of the funds in our list range from under 13 to more than 18. These differences should be considered as one evaluates which funds may be appropriate for a portfolio—remember, lower P/E ratios may indicate better value for investors.
Each index can also vary based on the average market capitalization of its component companies. The funds on our list vary from an average market cap of about $62 billion to a high of more than $100 billion.
