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Investors who are looking for quality and value in this current market have plenty of work to do to find investments that meet their underlying criteria. Indeed, by most metrics, U.S. stocks are at or near their historic highs in terms of valuation, driven by a number of macro factors which continue to flood the U.S. investing landscape with domestic and foreign dollars.
Accordingly, there are some in the investing community who are now growing wary about putting fresh capital to work in the market. That said, for many of us with retirement accounts and forced savings vehicles, there will always be a trickle of new capital into these accounts that needs to be invested.
So, where to find the sort of value and quality we’re looking for? Here are three exchange traded funds (ETFs) I think tick most of the boxes for investors who are in a similar boat as I right now.
Vanguard Value ETF (VTV)
I’m going to start with my favorite ETF provider Vanguard, and the company’s core quality/value ETF in the Vanguard Value ETF (VTV).
This ETF holds a diversified basket of large and mid-cap U.S. value stocks, with a focus on companies with lower valuation metrics and other valuation characteristics. The companies held within this ETF consist of some of the best-quality companies in the financials, healthcare, industrials and consumer staples sectors (among others). So, for investors who are looking for defensive exposure to the stock market can do well by owning one of the cheapest options in the world of large-cap value.
With an extremely low expense ratio of just four basis points (0.04%), the diversification this ETF provides alongside a dividend yield above 2% is impressive. I think this ETF’s pro-value view and its forces on the value factor, which has historically delivered a return premium over long periods of time relative to growth stocks, should be worth considering in this current environment in which many top AI stocks are trading at levels which don’t make sense.
Dimensional U.S. Targeted Value ETF (DFAT)
For investors looking to retain significant exposure to the U.S. market, but do so in a value-conscious manner, the Dimensional U.S. Targeted Value ETF (DFAT) is another excellent option.
This ETF focuses more on the small and mid-cap areas of the U.S. stock market, so it remains a solid counterbalance to our first ETF pick. With an emphasis on picking companies that are profitable and have solid valuations metrics, investors can rest assured that the holdings in the DFAT position within their portfolio will be smaller, cheaper on key valuation metrics (such as price/book and price/earnings metrics) and be more profitable than the average small-cap company.
Personally, I think the entire small-cap sector could have their day in the sun, if we do see a broadening out of the current trading dynamics in the market. Mega-cap names have led the way for a long time in the equity market, with top-tier companies continuing to drive the majority of index returns for investors. However, if we do see a return toward historical norms with small and mid-cap stocks providing investors with higher growth rates, this is a space that could reward those with a long-term investing time horizon, particularly during a period of historically high valuation multiples across the board.
iShares MSCI International Quality Factor ETF (IQLT)
I’m of the view that international stocks have largely been left for dead by many investors, rightly or wrongly. While some international stock markets have outperformed the U.S. in recent years, investors here have not yet woken up to the opportunity abroad – at least, that’s my opinion right now.
That said, for investors looking for some quality international exposure within their portfolios, the iShares MSCI International Quality Factor ETF (IQLT) would be one of my preferred options in this current investment landscape. This ETF focuses on large and mid-cap companies across Europe, Japan and other developed markets, with various filters in place to focus on companies with the highest returns on equity, low financial leverage, and stable historical earnings. These holdings are then weighted to remain close to the parent index, so that factor exposure does not become a sector bet.
That’s a methodology I can get behind. Now, this factor-specific perspective on which stocks market it into the IQLT fund does result in an expense ratio which is higher than most ETFs I’d recommend, at 0.3%. However, in the grand scheme of things, and compared to a range of mutual funds in the market, this is an expense ratio I can live with.