There is sufficient information in the financial and academic communities that Large Cap Value funds tend to outperform Large Cap Blend funds over long periods of time. I could cite many reports, news articles and academic papers to show support for this claim. But, I’d rather just jump right into the data that is readily available to all of us with a few online tools. My favorite tool for this job is: PortfolioVisualizer.com
Before I decide to invest in an asset class, sector or region; I perform this simple back-test to see if it’s worth diversifying some of my large cap blend allocation (S&P 500 index fund) into another fund. So, let’s take a look at how U.S. Large Cap Value has performed versus U.S. Large Cap Blend over the last 45 years.
This helps me to see that this is definitely an investable asset class. Large Cap Value has a 1.14% better CAGR (compound annual growth rate) than Large Cap Blend. This number may sound small, but it has a huge impact on long-term investments. Over this 45 year period, that 1.14% lead has made a $479,000 difference on a $10,000 initial investment. The only caution I see here is the correlation to the U.S. Market which is 0.95. That’s not the best diversifier available, but I think I’ll let that slide due to the significant out-performance that Large Cap Value has provided.
Now, because I like to call myself The Deep Value ETF Accumulator, I’d like to know how the oldest ETF available in the U.S. Large Cap Value category has done versus SPY, the oldest S&P 500 ETF. The oldest ETF available in the Large Cap Blend category is the SPDR® Dow Jones® Industrial Average ETF (DIA : $DIA).
Once again, Large Cap Value (DIA) has outperformed Large Cap Blend (SPY) over a shorter time-frame of 19 years. Value has beat Blend by 0.83% CAGR. Also, the U.S. Market correlation is a little better at 0.93.
At this point, I’ve pretty much made up my mind that I am probably going to allocate some of my portfolio toward U.S. Large Cap Value. But, there are a lot of ETFs in this category to sort through. According to ETFdb.com there are currently 65 ETFs available in this category. I have taken the liberty of ignoring any ETFs that are younger than 10 years old. This helps me to weed out most of the ETFs that may have some sort of short-term out-performance that might not be trustworthy over the long haul. I don’t experiment with the flavor-of-month products from the ETF industry. By eliminating the younger ETFs, I’ve brought my choice down to 22 Large Cap Value ETFs.
At first glance, it’s obvious from this chart that FVD outperforms. That is true, but sometimes when you stretch the back-test out further than 10 years, the best ranked ETF in this list isn’t always the best performing ETF. Spoiler alert, FVD does outperform even when going back to its’ inception. I compared each ETF in this list head-to-head on PortfolioVisualizer.com The results of that back test did in fact prove that the top 4 in the list above are indeed the top 4 performing ETFs in this category. Rather than showing those numerous back-tests, I’ll just show the back-test for the top 4.
First Trust Value Line® Dividend Index Fund (FVD)
PowerShares Dynamic Large Cap Value Portfolio (PWV)
SPDR® Dow Jones® Industrial Average ETF (DIA)
By this point, I’m just about 100% sure I will be allocating some portion of my portfolio into FVD. Over the last 12 years this fund has outperformed DIA by a whopping 2.29% CAGR. But, before I commit, I will do my due diligence by reading the prospectus, and do a quick review of the ETF Deathwatch List over at InvestWithAnEdge.com. Good news, FVD is not on the Deathwatch List and I like what I see in the prospectus.
First Trust Value Line® Dividend Index Fund (FVD) wins the Gold Star in the U.S. Large Cap Value category.
Here are some key facts that you may want to know about the First Trust Value Line® Dividend Index Fund (FVD)
The objective of the Fund is to seek investment results that correspond generally to the price and yield, before fees and expenses, of the Value Line® Dividend Index.
The index begins with the universe of stocks that Value Line® gives a SafetyTM Ranking of #1 or #2 using the Value Line® SafetyTMRanking System. All registered investment companies, limited partnerships and foreign securities not listed in the U.S. are removed from this universe.
From those stocks, Value Line® selects those companies with a higher than average dividend yield, as compared to the indicated dividend yield of the Standard & Poor’s 500 Composite Stock Price Index.
Value Line® then eliminates those companies with an equity market capitalization of less than $1 billion.
The index seeks to be equally weighted in each of the securities in the index. The index is rebalanced on the application of the above model on a monthly basis.
12-Month Distribution Rate (as of 5/31/2017) = 2.02%
Net expense ratio = 0.70%
Average daily trade volume = 445,803 shares
Net assets = $3,629,359,956
Portfolio turnover rate = 60%
Number Of Holdings = 188
Top Sector Exposure (as a percentage of the portfolio) Utilities 22.19
Financials 16.59
Consumer Staples 14.31
Industrials 12.35
Health Care 8.94
Information Technology 8.50
Consumer Discretionary 6.45
Energy 3.21
Real Estate 3.21
Materials 2.66
Thank you for taking the time to read this article. Please fill out the comment block at the bottom of this page with any questions you may have.
Full disclosure: I own shares of FVD and intend to invest more in this fund in the future. I’m not a financial advisor. Please do your own due diligence or seek professional advice before investing.
Thank you, The Deep Value ETF Accumulator, aka Micah McDonald
Do you think the expense ratio is too high for FVD?
Hi Mike
The expense ratio is accounted for in the total returns.
It is higher than the rest, but I think FVD is worth it in the large cap value category.
Thanks for asking.
Micah