Do you want to add value stocks to your portfolio? Buying undervalued stocks can pay off in the long run. Today we will take a closer look at value investing and an ETF to provide exposure:
Value vs. Growth
While growth investors look for stocks of companies that are expected to achieve steadily high earnings growth, value investors look for companies that trade at a significant discount to their intrinsic value.
There has long been a debate as to which approach to investing is more profitable. However, most financial planners believe that the two approaches, when used together, can drive diversification and achieve solid long-term results.
Value stocks are often undervalued and oversold, possibly due to negative news and sentiment. Stock prices will often be low compared to other measures such as earnings per share, cash flow per share or book value per share.
Another important feature: These companies have years or even decades of experience with established business models that generate profit. Many are also dividend payers and belong to cyclical industries.
Given the intrinsic value of these companies, investors expect that they will eventually recover.
Value seekers are typically contrarian investors with a long-term horizon, who strive to buy robust securities at a bargain price.
Warren Buffett – CEO and Chairman of Berkshire Hathaway (NYSE :), (NYSE 🙂 – considered one of the most successful value investors of all time. His annual shareholder letters highlight Buffett & # 39; s approach to value investing.
Buffett was a student of the father of value investing, Benjamin Graham, at Columbia University in New York. After graduation, he worked for (NYSE: Graham and later became the largest shareholder in Berkshire Hathaway, at the time a struggling group of textile mills. Five decades plus, and the most expensive, publicly traded stock ever is BRK .A, which closed yesterday. $ 310,659 per share costs (no, that's not a misprint).
Over the years, other value investors have followed the market movements of Graham and Buffett.
For those looking to invest in a value basket, this ETF should be on your radar:
iShares S&P 500 Value ETF
Current price: $ 114.52
52 Week Range: $ 81.70 – $ 132.10
Dividend Yield: 3.29%
Expense ratio: 0.18%
iShares S&P 500 Value ETF (NYSE 🙂 provides exposure to US-based large capitalization companies that may be undervalued compared to peers and thus provide long-term capital growth. The fund started trading in May 2000.
IVE, which has 386 companies, tracks the index. When measuring stocks, the index uses three factors, namely the ratios between book value, income and sale / price. In terms of sector allocation, health care and financial services have the highest weight (about 20% each), followed by consumer staples and industry and services.
The top ten stocks in the fund comprise more than 20% of its net assets in excess of $ 15 billion. Berkshire Hathaway, UnitedHealth (NYSE :), Verizon Communications (NYSE :), Johnson & Johnson (NYSE :), and Pfizer (NYSE 🙂 top the list of companies. In fact, six of the first ten are also listed on the.
Since the beginning of the year, the ETF is down about 13%. In comparison, the index is up about 3%; the DJIA is down 1%.
Underlying P / E and P / B ratios for IVE are 14.76 and 1.91. We would like to buy the fund if the price falls below $ 110. Focusing on potentially undervalued, established large-cap stocks that pay dividends could add a margin of safety to long-term portfolios.
Bottom Line
Value investing is quite simple in theory. Investors look for and buy robust, undervalued companies and then wait for them to appreciate. It is expected that The Street will accommodate them in due course.
However, what appears to be a value proposition can also turn out to be a trap. Therefore, investors should exercise due care in choosing companies when looking for diamonds in the rough. They can also use ETFs as a way to invest in a basket of securities to help them diversify.
Several other funds with similar goals may also be of interest, including:
Alpha Architect International Quantitative Value ETF (NYSE 🙂
iShares Core S&P US Value ETF (NASDAQ 🙂
iShares Russell Top 200 Value ETF (NYSE 🙂
Schwab US Large-Cap Value ETF ™ (NYSE 🙂
Vanguard S&P 500 Value Index Fund ETF Shares (NYSE 🙂
Vanguard Value Index Fund ETF Shares (NYSE 🙂
In the coming weeks, we plan to cover them as well as ETFs that could be suitable for growth strategy investing.
