7 Reasons to Buy the Vanguard Value ETF If You Are Worried About a Stock Market

Vanguard offers dozens of equity exchange-traded funds (ETFs). Some of them, like the Vanguard S&P 500 Growth ETF, have outperformed the S&P 500 and Nasdaq Composite so far this year. But any Vanguard fund that doesn’t own Nvidia has underperformed — even top funds like the Vanguard Value ETF (VTV 1.27%).

Here are seven reasons why this particular fund stands out as a top ETF to buy if you’re worried about a stock market sell-off.

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1. Effective diversification

The Vanguard Value ETF has 342 holdings, compared to 504 for the Vanguard S&P 500 ETF (VOO 1.12%) and 188 for the Vanguard Growth ETF (VUG 0.85%). But as you can see in the table, the Vanguard Value ETF is far less top heavy.

Data source: Vanguard.

The Vanguard Value ETF has just 22.5% of its weighting in its top 10 holdings, far less than 36.6% for the Vanguard S&P 500 ETF and 61.3% for the Vanguard Growth ETF. Less emphasis on the largest holdings protects the fund from taking a major hit if a few key holdings drop. However, it can also hold the fund back if those megacap names put up outsized returns — which is exactly what is driving such a strong year for the Vanguard Growth ETF.

Some downside risk protection can be achieved by having a diversified portfolio and not too much correlation to a particular theme or sector. The megacap tech-oriented names aren’t perfectly correlated. But if Microsoft is down big, there’s a good chance Amazon, Alphabet, and other names wouldn’t be doing so great either — which could compound into a volatile move in the Growth ETF.

2. Solid yield

The Vanguard Value ETF has a 2.3% yield, which is quite a bit higher than the 1.3% yield for the Vanguard S&P 500 ETF (VOO 1.12%) or the 0.4% yield of the Vanguard Growth ETF (VUG 0.85%).

A percentage point difference or two in yield doesn’t look all that appealing when the major indexes are putting up massive returns. Rather, dividends show their true value when equity prices are falling. Collecting passive income without the need to sell stock can be a saving grace during a market downturn. It can provide added dry powder to reinvest in the market at attractive prices. Or it can help with financial planning.

Either way, the Vanguard Value ETF’s higher yield relative to an S&P 500 fund or a growth-oriented fund is an advantage during a sell-off.

3. Low valuation

Many megacap growth stocks have seen their valuations increase due to their stock prices rising at a faster rate than earnings. Funds that don’t own megacap names — or own a lower weight than the S&P 500 — stand a good chance of trading at a discount to the benchmark.

The Vanguard Value ETF has a 19.7 price-to-earnings (P/E) ratio, which is roughly half of the Vanguard Growth ETF and significantly lower than the 27.1 P/E ratio of the Vanguard S&P 500 ETF.

Valuations can get inflated during periods of investor optimism. But when there’s a widespread sell-off, valuations can get put to the test when investors are less willing to pay a premium for potential growth and care more about where a business is today. Similarly, during skyrocketing bull markets, investors have a higher risk appetite and are willing to pay a premium for a business in the hopes it bridges the gap between expectations and reality.

No matter what the market is doing, investing in value stocks is a good choice for risk-averse investors, especially those who are more focused on capital preservation than capital appreciation.

4. Impressive past performance

Over the long term, innovation and technological breakthroughs can lead to explosive gains in the stock market. This is why growth stocks have a higher risk/potential return profile than value stocks. But that doesn’t mean value stocks can’t reward patient investors.

The Vanguard Value ETF has put up excellent returns, producing a total return of 16% over the past year, 29% over the past three years, 68% over the past five years, and 161%…