Clever Large Cap Value Investing: A Better Approach Than Choosing From Available ETFs

Surprisingly, low fee open-end mutual funds and exchange-traded funds (ETFs) in the large cap value category are not compelling. Instead, retail investors should consider direct investment in large cap value stocks. Furthermore, retail investors who have longer time horizons ought to consider a discounted closed-end fund alternative for large cap growth exposure.

Fund Evaluation

Investors seeking exposure to large cap value stocks have many funds to choose from. They should select funds using the following criteria:

Low expense ratios. The less that investors pay in fund-level fees, the more they keep.

Holdings with low price-to-book ratios. These funds should have a mix of value and growth holdings that leads to a mid-range price-to-book ratio average for the portfolio.

Holdings with large cap market capitalizations. These funds should hold large cap firms to gain the expected exposure.

Financially strong holdings. This is the fly in the ointment! Funds should be biased towards stocks with stronger financial positions that can weather bad times. Funds with more holdings which score as "safe" according to the Altman Z-score metric are preferable to funds with weaker holdings.

A collection of large cap value funds with expense ratios under 0.25% were evaluated based on their top 25 holdings. Key attributes of these funds and their holdings are listed below:

Ticker	Fund	Expense Ratio	Avg P/B	Avg Market Cap ($ Millions)	"Safe" Weight
VTV	Vanguard Value ETF	0.12%	2.69	131038	55.6%
VVIAX	Vanguard Value Index Adm	0.12%	2.69	131038	55.6%
VVISX	Vanguard Value Index Signal	0.12%	2.69	131038	55.6%
MGV	Vanguard Mega Cap 300 Value Index ETF	0.12%	2.69	131038	55.6%
SCHV	Schwab U.S. Large-Cap Value ETF	0.13%	5.78	139813	60.7%
IVE	iShares S&P 500 Value Index	0.18%	2.10	126208	34.1%
IWD	iShares Russell 1000 Value Index	0.20%	1.86	127830	42.9%
IWX	iShares Russell Top 200 Value Index	0.20%	1.86	127830	42.9%