VOE: Why This Mid-Cap Value ETF Isn't Your Best Option Right Now

Jan. 13, 2022 12:00 PM ETVanguard Mid-Cap Value ETF (VOE)IJJ, RFV, VOO, VTV1 Comment


  • The Vanguard Mid-Cap Value ETF provides exposure to about 200 U.S. equities. However, most holdings are actually part of the large-cap S&P 500 Index, just with significantly different allocations.
  • Despite its name, VOE is a relatively cheap ETF based on price-earnings, and doesn't have the same valuation problems that may plague funds overweighted on mega-caps.
  • However, when compared with the large-cap Vanguard Value ETF, VOE has very few redeeming qualities, including a higher P/E. Its constituents also are behind on growth, profitability, and analyst expectations.
  • I also expect VOE to be much more volatile than it has been in the past, and could end up being an underperformer should the market experience a correction.
  • I don't recommend investing in VOE at this time, and suggest investors look into large-cap value ETFs like VTV instead.
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Hand of male putting wood cube block with word VALUE on wooden table

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Investment Thesis

The Vanguard Mid-Cap Value ETF (NYSEARCA:VOE) is not all that it seems. For starters, the definition of mid-cap stocks that its Index provider uses is a bit questionable, considering that over 90% of the fund's constituents are members of the large-cap S&P 500 Index (SPY). Also, the Index provider doesn't strictly classify stocks as value or growth and instead allows some overlap between the two. It's what you get with Vanguard ETFs, and unfortunately for the average investor, it makes comparisons with other mid-cap value ETFs challenging.

However, a solution is just to perform some old-school analysis of its fundamentals, and that's what I did and will be presenting in this article. I've made several findings that surprised me, including that VOE's current weighted-average five-year beta is much higher than the ETF has experienced over the same period. In addition, its growth rates on revenue and earnings, both historical and estimated, are meager, even after considering the fund's 22x forward price-earnings ratio. Given this, I don't recommend buying VOE, but I think value stocks are generally due for a comeback with earnings season fast approaching.

ETF Overview

VOE passively tracks the performance of the CRSP US Mid Cap Value Index. CRSP Value Indexes assess value stocks based on five factors:

  • Book to Price
  • Forward Earnings to Price
  • Historical Earnings to Price
  • Dividends to Price
  • Sales to Price

The Index Fact Sheet provides an excellent overview of its top holdings, sector exposures, and descriptive statistics on the range of market capitalizations across its constituents.

CRSP U.S. Mid Cap Value Index Fact Sheet

CRSP U.S. Mid Cap Value Index Fact Sheet

As shown, there are 198 constituents ranging from $535 million to $47 billion in size, but even the largest company has only a 1.30% weighting in the Index. The median and average market capitalization is around $18 billion. I should note that S&P Dow Jones Indices considers $13.1 billion to be the threshold for large-cap stocks, so it's essential to understand which Index provider an ETF uses, especially if you plan on making comparisons with other mid-cap value ETFs.

One benefit of VOE is diversification. Instead of the 29% allocation to Technology stocks you get with the Vanguard S&P 500 ETF (VOO), VOE only has a 5.81% allocation. Financials (16.66%) is the most dominant sector, followed by Consumer Discretionary (15.20%), Real Estate (12.76%), and Industrials (12.51%). It's safe to say that VOE represents a very different look at the equity market, which could be beneficial if mega-cap stocks lead the market to a correction.

I have also listed some additional statistics below based on January 10, 2022, close prices. Since dividend yield is one of the screening criteria, dividend growth investors may appreciate its 10.32% annualized dividend growth rate. However, the 1.77% starting yield means you'll require some patience before the distributions become anything substantial.

  • Current Price: $150.69
  • Assets Under Management: $15.69 billion
  • Expense Ratio: 0.07%
  • Launch Date: August 17, 2006
  • Trailing Dividend Yield: 1.77%
  • Five-Year Dividend CAGR: 7.49%
  • Ten-Year Dividend CAGR: 10.32%
  • Five-Year Beta: 1.03
  • Number of Securities: 198
  • Portfolio Turnover: 39%
  • Assets in Top Ten: 10.58%
  • 30-Day Median Bid-Ask Spread: 0.03%
  • Tracked Index: CRSP US Mid Cap Value Index

You can see that it's a well-established fund with over 15 years of history and nearly $16 billion in assets under management. The 0.07% expense ratio is quite low, too. Finally, I want to highlight VOE's latest portfolio turnover rate of 39%, which I consider high for the category. For context, the Vanguard Value ETF (VTV) portfolio turnover rate is only 10%. A key reason is that mid-cap stocks have an Index to graduate once they become large enough. In my view, it's a bit of a double-edged sword. On the one hand, removing stocks from the Index that have grown large enough is akin to profit-taking, which is usually a good idea when markets become overvalued. On the other hand, these stocks may end up being the highest-potential ones, so momentum is limited.

VOE Performance

The following graph shows the total return performance, assuming reinvested dividends, for VOE since its inception. I have chosen to compare it with VTV and two other mid-cap value ETFs: the iShares S&P Mid-Cap 400 Value ETF (IJJ) and the Invesco S&P MidCap 400 Pure Value ETF (RFV).

Portfolio Visualizer Performance Comparison - VOE, IJJ, RFV, and VTV

Portfolio Visualizer

This long-term chart paints an excellent picture for VOE. Not only has it generated the highest returns with its 9.46% annualized growth rate, but it's been one of the least-risky. VOE's higher market capitalization explains this lower risk profile because it tracks a CRSP Index. IJJ and RFV draw from the S&P MidCap 400 Index, which has a median market capitalization of only $5.2 billion, and it's well-known that larger-cap stocks tend to be less volatile. Given that I could not find any lowly-concentrated, large-cap value ETFs on the market, I find VOE a truly unique fund. However, I want to look at its fundamentals before I form an opinion on how well I expect it to perform going forward.

Fundamental Analysis

Due to VOE's low concentration level among its top ten holdings, I want to break it down further by industry according to Global Industry Classification Standards ("GICS"). I have done the same thing for VTV to highlight the key differences between CRSP's mid-and large-cap value Indexes.

VOE fundamental metrics including beta, revenue growth, earnings growth, price to earnings, price to sales, dividend yield, and dividend growth rates.

Created By Author Using Data From Seeking Alpha

Based on this overview, VOE has few redeeming qualities. Its historical and forward revenue growth rates slightly trail VTV's, and analysts' estimates on EPS are lower by 2.17%. Investors aren't getting a discount on price in exchange for these lower growth rates, either. VOE's weighted-average forward price-earnings ratio is 21.75 compared with 19.75 for VTV. While both funds' valuations are significantly lower than what S&P 500 Index funds offer (about 29x forward earnings), I would have to lean in favor of VTV at the moment.

I want to emphasize that the dividend metrics I calculated in the last two columns are for dividend-paying companies only. About 84% of the allocation in VOE is to dividend-paying stocks, so I estimate the net forward yield for the fund to be 1.96% (2.33% x 84%). For VTV, 93% of the fund is allocated to dividend-paying stocks, so the net yield works out to be 2.23%. Even after adjusting for fees, these yields suggest that strong dividend growth should continue.

Finally, recall from the bullet points earlier in the article how VOE's five-year beta was 1.03, showing a fund with market-like volatility. However, the fund's current constituents have a weighted-average beta of 1.13. The difference is VOE's somewhat high portfolio turnover rate of 39% that I discussed earlier. Past performance may become less reliable as the fund rotates in and out of stocks. It certainly looks that way now, with VOE likely to be an outperformer if the bull market continues and an underperformer if it ends.

Technical and Quantitative Analysis

I have created a table similar to the one above, but this next one includes technical indicators based on moving average prices. Also, for those familiar with Seeking Alpha Grades, you may have noticed that Grades for EPS Revisions, Growth, Momentum, Profitability, and Value are unavailable at the ETF level. As a workaround, I have calculated these Grades using the same weighted-average method as before. I did the same with each constituents' Seeking Alpha Quant Rating, which I find does a nice job bringing it all together.

VOE Seeking Alpha Technical and Seeking Alpha Quant Grades

Created By Author Using Data From Seeking Alpha

Like the fundamental analysis, I find VOE inferior to VTV based on these technical and quantitative metrics. It's possible to make the argument that VOE is less likely to be overvalued based on its lower price vs. its 50-day and 200-day moving average prices. However, doing so would require ignoring that analysts are downgrading EPS estimates at a faster rate (C+ grade vs. B-). You would also have to forget that the large-caps have a better profitability grade than the mid-caps (A- vs. B) and that the large-caps have a stronger Quant Score (3.66 vs. 3.44). So while there may be a slight value opportunity here, the balance of probabilities is not in VOE's favor.

Investment Recommendation and Conclusion

Often with investing, you get what you pay for. But in the case of VOE, you're paying a premium (2x more forward earnings) for inferior revenue growth, earnings growth, earnings revisions, and profitability levels. With earnings season starting near the end of the month, I think we will soon get more clarity on if the recent shift in favor of value stocks is temporary. I believe it isn't, and have recently been advocating for investors to shift away from high P/E stocks and into value ones. However, there are a lot of choices, and currently, the set-up is not in favor of the mid-caps. Therefore, I don't suggest buying VOE at this time and suggest looking into large-cap value ETFs like VTV instead. For an excellent review of that fund, as well as suggestions on even better alternatives, I suggest checking out ETF Monkey's latest article here.

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This article was written by

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I'm a data-driven ETF analyst who likes to do deep dives into how funds are constructed and what factors are likely to make them winners or losers. I have a database of over 700 ETFs that I follow, so I'm able to show readers the best- and worst-performing funds in each category with each one I review. My preference is for stocks to have strong cash-generating and debt management qualities. I welcome all questions, comments, and suggestions for improvement, and I enjoy my time engaging with the Seeking Alpha community.

I hold a Bachelors degree in Commerce with a major in Accounting and hold a Certificate in Advanced Investment Advice from the Canadian Securities Institute. I have also completed the Portfolio Management Techniques course, fulfilling the educational requirements for a Chartered Investment Manager (CIM) designation. I have passed CFA Level 1, and I am currently studying to become licensed to advise on options and derivatives in Canada. This past November, I became a contributor for the new Hoya Capital Income Builder Marketplace Service, and enjoy working with and sharing ideas with some of the best researchers on Seeking Alpha. Sign up for a free trial today! Hoya Capital Income Builder.

Disclosure: I/we have a beneficial long position in the shares of SPY either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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