Since my first Looking for Alpha BUY rated article final July, the Vanguard Mega Cap Worth ETF (NYSEARCA:MGV) is up 4.5% and has outperformed the S&P500 by virtually 3%. Buyers within the MGV ETF get low-cost (0.07%) and diversified publicity to the biggest worth shares within the U.S. inventory market. The fund has a powerful long-term efficiency monitor document (a 10-year common annual whole return of 11%+) as a result of many of those mega-cap “worth” corporations additionally ship progress and earnings as properly. That being the case, traders who wish to construct a well-diversified portfolio constructed for the long-term, and one that may climate difficult markets (like the present one), ought to think about the comparatively defensively positioned MGV ETF as a core portfolio holding.
My followers know I counsel traders to construct and preserve a well-diversified portfolio – and to carry it – by the market’s up-n-down cycles (strategically including on down-cycles). The MGV Mega-cap Worth is a wonderful candidate so as to add cost-efficient and comparatively defensive diversification to a portfolio that already has first rate publicity to the broad market indexes just like the S&P500, DJIA, and Nasdaq-100. Defensive sectors like HealthCare, Power, and Financials usually outperform the broad market throughout occasions of inflation and better rates of interest. So, let’s take a better have a look at the MGV ETF to see the way it has positioned traders for fulfillment going ahead.
The highest-10 holdings within the MGV ETF are proven under and weren’t taken instantly from the Vanguard MGV ETF homepage, the place you may get further info on the fund, however had been taken by utilizing the Vanguard Fund examine instrument to point out the variations within the MGV ETF as in comparison with the Vanguard S&P 500 ETF (VOO).
The highest-10 holdings within the MGV ETF equate to 26.3% of what I think about to be a well-diversified portfolio of 145 corporations:
My first statement as to the variations between the MGV ETF versus the standard S&P500 fund is that the MGV portfolio holds solely 145 whole corporations versus 500. That’s, the MGV ETF is just not solely considerably extra concentrated as in comparison with the standard S&P500 ETF, it’s extra concentrated in “worth”.
Secondly, gone are the standard S&P500 fund’s top-3 holdings like Apple (AAPL), Microsoft (MSFT), and Alphabet (GOOG) – that are changed within the MGV ETF by Berkshire Hathaway (BRK.B), Exxon Mobil (XOM), and UnitedHealth Group (UNH), respectively.
For the #1 holdings within the two funds, observe that Berkshire at present trades with a ahead P/E of 19x whereas Apple trades with a ahead P/E of 25.2x.
For the #2 holdings within the two funds, Exxon has a ahead P/E of solely 10.4x and yields 3.23% whereas Microsoft at present has a ahead P/E of 27.3x and yields 1.07% – indicating considerably extra worth (and arguably much less long-term progress).
UnitedHealth Group, the #3 holding within the MGV ETF, trades with a ahead P/E of 19.2x and yields 1.38%, whereas Google – within the S&P500 ETF – trades with a ahead P/E of 18.4x however pays no dividend. That is one cause why Google ought to pay a dividend: with such a low ahead P/E compared to its progress fee and free-cash-flow profile, even a modest dividend would seemingly put GOOG into the “worth” class. This is the reason Google continues to be my favourite large-cap inventory.
Nevertheless, though GOOG is just not within the MGV portfolio, my general favourite expertise inventory, Broadcom (AVGO), is – it’s the #13 holding with a 1.66% allocation. As I predicted in a Looking for Alpha article late final month, Broadcom considerably beat consensus earnings estimates final Thursday as a consequence of “pressing” demand for regenerative AI associated merchandise. AVGO inventory was +$34.11/share (5.7%) Friday and with a $18.40/share annual dividend, yields 2.91%. Observe Broadcom generated $3.9 billion in free-cash-flow in Q1 FY23, or an estimated $9.10/share.
With Exxon, Chevron (CVX), and Berkshire Hathaway within the top-10 holdings, the MGV ETF has robust publicity to the power sector (and their dividends). I added Berkshire to that record as a result of, as you seemingly already know, BRK owns $27.6 billion value of Chevron inventory (its #3 holding and eight.3% of the Berkshire portfolio of shares) in addition to $11.9 billion value of Occidental Petroleum (OXY) (3.6% of the BRK portfolio).
Together with UNH, with the #8-10 holdings being big-pharma corporations Merck (MRK), AbbVie (ABBV), and Pfizer (PFE), the health-care sector is properly represented within the MGV ETF. These three corporations are robust dividend payers and yield 2.73%, 3.79%, and three.99%, respectively.
From a complete portfolio perspective, the MGV ETF is defensively positioned with over-weight positions (as in comparison with the S&P500) within the HealthCare, Financials, Industrials, Client Staples, and Power sectors:
For instance, the HealthCare sector at present represents 14.3% of the S&P500 whereas the power sector equates to 4.9% of the index. These weights had been taken by the illustration within the S&P 500 by the SPDR S&P Healthcare ETF (XLV) and the SPDR S&P Power ETF (XLE), respectively.
From a valuation perspective, the MGV ETF trades at a major low cost to the S&P500:
That being the case, clearly the MGV ETF offers traders vital diversification as in comparison with the S&P500 – and the worth comparisons are much more favorable with respect to the Nasdaq-100.
The chart under reveals the long-term efficiency track-record of the MGV, and a really strong 10-year common annual return of 11.1%:
The next graphic compares the 5-year whole returns of the MGV ETF with these of a few of its friends, together with the SPDR S&P Worth ETF (SPYV), the Constancy Worth Issue ETF (FVAL), and the Vanguard Worth ETF (VTV):
As might be seen within the chart, this can be a fairly tight group for a 5-year comparability and the SPYV ETF gained by a nostril. A part of that is likely to be as a result of the SPYV ETF’s expense charge is 3 foundation factors decrease than MGV (0.04%).
Whereas the MGV ETF has outperformed the S&P500 over the previous 12 months, that might change if the rate of interest outlook turns into extra favorable for progress. Meantime, the businesses within the MGV ETF are usually not immune from the headwinds of the worldwide economic system: excessive inflation – partly as a consequence of Putin’s horrific war-on-Ukraine that broke the worldwide power & meals provide chains – increased rates of interest, on-going commerce tensions between the U.S. and China, and on-going challenges with respect to the worldwide pandemic’s affect on international supply-chains (however these proceed to recede).
Whereas the present 30-day SEC yield of the MGV ETF is 2.48% is first rate, observe it doesn’t examine with present fixed-income charges (anecdotally, I obtained a 5% 18-month CD final week).
Abstract & Conclusion
I just like the MGV ETF as a result of it’s a differentiator in my portfolio as in comparison with my holdings within the broad market averages ETFs (primarily VOO, DIA, and QQQ). Publicity to the comparatively lower-valuation holdings in MGV look like prudent within the present atmosphere. I reiterate my BUY on the MGV ETF, however recommend traders wanting to ascertain a place accomplish that by averaging into the fund over time (maybe so long as 3-6 months) in an effort to benefit from market volatility. Maybe chop-up your full-position allocation into tenths, and make a purchase order each couple of weeks – whereas paying shut consideration to any potential market down-turns.