VLUE's 46-Point Lead Over VTV Exposes Factor Risk
The iShares MSCI USA Value Factor ETF outperformed the Vanguard Value ETF by 46 percentage points last year, demonstrating how differing index construction methods can radically alter a fund's risk profile and sector exposure.
The iShares MSCI USA Value Factor ETF (VLUE) returned 71.64% over the past year, dwarfing the 25.63% return of the Vanguard Value ETF (VTV). While both funds market themselves as plays on cheap U.S. large-caps, this 46-percentage-point performance gap highlights how differing index construction methods can radically alter a fund's actual portfolio allocation.
VTV tracks the CRSP US Large Cap Value Index, a market-cap-weighted basket of more than 340 stocks. It screens for traditional value metrics like book value, historical and forward price-to-earnings ratios, dividend yield, and sales-to-price. This methodology naturally concentrates the portfolio in established mega-cap names like Berkshire Hathaway, JPMorgan Chase, ExxonMobil, and UnitedHealth. With an expense ratio of just 0.03% and a higher dividend yield, VTV functions as a broad, steady core holding.
VLUE employs a more aggressive, sector-neutral methodology to isolate the value factor itself. It tracks the MSCI USA Enhanced Value Index, which ranks stocks strictly within their own sectors by price-to-book, forward P/E, and enterprise-value-to-cash-flow, holding only the cheapest names. Crucially, a sector-neutral mandate requires VLUE to maintain roughly the same sector weights as the broader MSCI USA index, regardless of whether those sectors historically qualify as value.
This structural mandate transformed VLUE from a diversified value fund into a highly concentrated semiconductor wager. When chipmakers traded at depressed multiples, the rules-based screen flagged them, and the sector-neutral requirement forced the fund to buy. Micron Technology now comprises 11.60% of the portfolio, Intel holds 9.26%, and holdings like Cisco, Applied Materials, and Western Digital push semiconductors and tech hardware to roughly 31.5% of the fund.
For market professionals, this divergence serves as a warning about the hidden risks in factor investing. A fund's label does not guarantee its underlying exposure. VTV offers reliable mega-cap value weightings, making it suitable for conservative allocation. VLUE, by contrast, behaves as a volatile satellite position that can inadvertently become a thematic technology bet when specific industries fall out of favor.
