VOE: Of Neutral Value

Summary

  • The Vanguard Mid-Cap Value ETF is in a sticky spot – its TTM dividend yield of 1.75% is too low for it to be considered investable by income investors.
  • Secondly, its price gains are not proportionate to its high-risk profile.
  • As the ETF’s investable quotient is floating in the twilight zone, I’ll go with a neutral rating.
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Strive not to be a success, but rather to be of value. – Albert Einstein

The Vanguard Mid-Cap Value ETF (NYSEARCA:VOE) invests in a basket of mid-caps that are regarded as value stocks – in other words, stocks that trade at a lower price despite having robust fundamentals like a healthy dividend payout history, and consistently strong earnings and revenue growth. Typically, people like to chase growth stocks because the concept of “growth” is connected with “multi-bagging” stocks, making it exciting for the investors. Value stocks, on the other hand, are passed over – even those with high dividend yield and low Price/Earnings ratio – because they are perceived to be old-fashioned and non-growth businesses.

VOE latches on to value stocks and manages its assets at a very low expense ratio of 0.07%. Here is my take on the ETF’s investable quotient:

Price Momentum

01VOE.png

Trading View

Since its inception in 2006 and January 2020 (15 years), which represents the pre-COVID-19 era, the ETF’s price gained just 127% (single-digit growth every year on a simple average basis). However, in the last 12 months, VOE’s price gained a whopping 23% because investors were all over the place – pushing up the ETF’s price gain from its inception to January 2022 (16 years) to 196%. However, I believe that this price gain of the last 12 months is a one-off.

VOE’s price momentum implies that the ETF’s price appreciates at a rather slow pace annually over the long term. This kind of moderate appreciation is expected of value stocks, and therefore attractiveness of such stocks lies in their dividend payout. Let us check if VOE fulfills the expectation on the dividend yield front.

Dividend Yield

Yield

SeekingAlpha

For an ETF that invests in value stocks, VOE’s TTM dividend fares poorly at 1.75%. The only silver lining is that VOE pays dividends consistently and has been paying them consecutively for the last 13 years. Given that its TTM dividend growth rate is a negative 4.74%, I believe that its forward dividend yield will hover between 1.675% and 1.75%. This is almost equal to the current 10-Year Treasury rate, which is all set to rise this year.

Portfolio Analysis

Stats

Vanguard

VOE’s portfolio truly looks like a high-value one. An average Price/Earnings ratio of 15.90 and an average Price/Book ratio of 2.3 suggest that its portfolio is underpriced. As of November 30, 2021, the ETF had invested its assets in 211 stocks, with 10.90% of its assets invested in its top 10 holdings.

The ETF’s managers flip 39% of its holdings every year. Though VOE is tagged high (5/5) on its risk meter, its long-term price data reveal that the ETF’s price appreciates at a low rate.

Peer Comparison

Comps

SeekingAlpha

A comparison of VOE’s dividend yield and price momentum with those of its peers, the iShares Morningstar Mid-Cap Value ETF (IMCV) and iShares Russell Mid-Cap Value ETF (IWS), reveals the following:

  1. IMCV has lagged behind VOE and IWS in the 3–5 years price momentum shootout. Both VOE and IWS have performed at par in this period.
  2. However, IMCV has performed at par with its peers in the 10-year price momentum comparison.
  3. VOE’s price has gained the most in the last 10 years.
  4. VOE’s TTM dividend yield is slightly lower than IMCV’s and moderately higher than IWS’s.

There is really no takeaway about VOE from a peer comparison.

Summing Up

Typically, ETFs that invest in value stocks are preferred by income investors. However, VOE’s TTM dividend yield is just about at par with the 10-year Treasury rate, which makes it unattractive for income investors.

Data suggest that the ETF’s price grows at a low annual rate over the long run. That makes it a no-no for growth investors too.

The ETF makes the cut only for a rare class of investors – long-term investors who are okay with earning moderate combined returns (price gains plus dividend yield), with the majority of returns being delivered by price gains.

As VOE does not check all my value stocks investment boxes, I’ll go with a neutral rating.


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This article was written by

Michael A. Gayed, CFA profile picture
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.

Additional disclosure: This writing is for informational purposes only and Lead-Lag Publishing, LLC undertakes no obligation to update this article even if the opinions expressed change. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. It also does not offer to provide advisory or other services in any jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Lead-Lag Publishing, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

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