Is the Stock Market in Bubble Territory?
The U.S. stock market has experienced a significant bull run since early 2023, largely fueled by the hype and excitement surrounding artificial intelligence (AI). While this may be beneficial for investors who have participated in this trend, it has also led to inflated stock prices and high valuations by many metrics.
One particular metric that has raised concerns is the S&P 500's Shiller price-to-earnings (P/E) ratio, which measures stock prices against inflation-adjusted average earnings over the past 10 years. The index's current Shiller P/E ratio is around 39.5, the highest it has been since October 2000, during the peak of the dot-com bubble. Historically, these levels have often preceded sharp market corrections. This doesn't guarantee a similar outcome, but it should encourage investors to be cautious about the current stock market environment.
Why Seeking Value Might Be a Good Option Now
Growth stocks have been a popular choice for many investors in recent years due to their potential for high returns. However, growth stocks often come with increased risk and volatility because their prices reflect anticipated future growth, and any failure to meet investor expectations can trigger significant sell-offs.
Value stocks, on the other hand, tend to be more stable (though not immune to volatility), trade at lower valuations, and are known for their consistent cash flows. The value-oriented focus of VTV means it has a significantly lower exposure to the tech sector compared to the S&P 500 and growth ETFs. The top five sectors within the ETF are financials (22.8% of the ETF), industrials (16.5%), healthcare (13.5%), consumer discretionary (9.1%), and consumer staples (9%).
For context, tech stocks comprise 34% of the S&P 500; Nvidia, Microsoft, and Apple alone account for over 21%; and the top 10 holdings represent nearly 38% of the index.
What You Get by Investing in VTV
This ETF tracks the CRSP US Large Cap Value Index. To be included, a stock must be a large-cap company and meet specific criteria related to price-to-book, P/E, price-to-dividends, and price-to-sales ratios. These requirements ensure that investors gain exposure to companies that truly embody the value investing philosophy. Below are VTV's top 10 holdings:
| Company |
Percentage of the ETF |
| JPMorgan Chase |
3.61% |
| Berkshire Hathaway (Class B) |
3.27% |
| ExxonMobil |
2.18% |
| Walmart |
1.95% |
| Oracle |
1.93% |
| Johnson & Johnson |
1.79% |
| Home Depot |
1.66% |
| Procter & Gamble |
1.60% |
| AbbVie |
1.51% |
| Bank of America |
1.35% |
These companies are leaders in their respective industries, have demonstrated long-term stability, generate consistent cash flow, and offer attractive dividends (except for Berkshire Hathaway). The ETF has averaged a dividend yield close to 2.5% over the past decade, surpassing the S&P 500's 1.5% average during the same period.
Don't Expect Outsized Gains from VTV
Over the past decade, VTV has delivered an average total return of approximately 11.7%, which is generally considered excellent. However, the S&P 500 has averaged a total return of 14.8% over the same timeframe.
Investing in VTV with the expectation of consistently outperforming the market might be unrealistic. Instead, consider investing to hedge against the high valuation of the current market and the significant tech concentration within the S&P 500. While this concentration has benefited the S&P 500 in recent years, the same factors that have propelled it upward could also contribute to its decline.
A prime example is 2022, when the S&P 500 experienced a decline of over 19%. VTV also finished the year in negative territory, but with a more modest decline of approximately 4.5%. It's a valuable addition to your portfolio during market downturns, and with a low expense ratio of just 0.04%, it's an inexpensive way to add diversification and potentially mitigate risk.
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