Two Value ETFs for the Patient Investor: A Look at IWD and VTV

For the patient investor, the core thesis is straightforward: buy quality at a price. Value investing has a proven long-term track record, with many of the world's top investors using this approach to generate outstanding returns. Yet, as the evidence shows, this strategy has faced a multi-year lag behind growth stocks. From 2011 to 2020, large value funds underperformed large growth funds by more than 5 percentage points each year, and the gap was an astounding 32.2 percent in 2020 alone. This isn't a failure of the philosophy, but a reminder that markets cycle. The discipline lies in staying the course through these periods of relative underperformance.

The primary advantage of exchange-traded funds (ETFs) for a value-focused investor is instant diversification at low cost. Instead of trying to pick individual mispriced stocks-a task that requires immense research and is fraught with risk-ETFs provide exposure to hundreds of securities simultaneously. This automatic diversification reduces the individual stock risk inherent in any single holding. More importantly, it does so at a fraction of the cost of active management. The rise of ultra-low-cost ETFs has reshaped investing, allowing investors to build globally diversified portfolios for less than $30 per $100,000 annually. Small differences in investment costs can lead to dramatically different outcomes over time, making this a critical factor for long-term compounding.

For a disciplined value investor, the choice between funds like the Vanguard Value ETF (VTV) and the iShares Russell 1000 Value ETF (IWD) often comes down to the specific index, fees, and the fund's ability to capture the value premium over a full market cycle. Both offer the core benefit of broad diversification, but their underlying indexes and expense ratios differ. The Vanguard Value ETF, for instance, seeks to track the CRSP U.S. Large Cap Value index and carries an expense ratio of just 0.04 percent. The iShares Russell 1000 Value ETF tracks a different index and has a slightly higher fee. In a long-term game, these seemingly small differences in fees compound significantly. A difference of half a percent can mean tens of thousands of dollars in missed growth over three decades. The bottom line is that for a value investor, the goal is to own the basket of undervalued companies that the market has overlooked, not to pay a premium for the privilege.

Comparing the Building Blocks: IWD vs. VTV

For the disciplined investor, the choice between these two large-cap value ETFs comes down to the specifics of their construction. Both are passively managed vehicles designed to replicate their respective indexes, offering broad diversification across the U.S. value universe. Yet, the differences in their underlying indexes and fee structures create tangible distinctions in cost and, over time, in the investor's bottom line.

The foundation of each fund is its index. The iShares Russell 1000 Value ETF (IWD) tracks the Russell 1000 Value Index, which focuses on large-cap value stocks within the Russell 1000. The Vanguard Value ETF (VTV), on the other hand, follows the MSCI US Prime Market Value Index. While both capture the large-cap value segment, the MSCI index is broader, covering a wider range of market-cap-weighted value stocks. This subtle difference in construction can lead to variations in sector weightings and individual holdings, though the overall investment thesis remains aligned.

The most significant divergence, however, is in cost. VTV carries an expense ratio of 0.04%, while IWD's fee is 0.19%. This half-percentage-point gap is not a trivial detail. As the evidence shows, small differences in investment costs can lead to dramatically different outcomes over time. Over a three-decade investment horizon, this seemingly small spread compounds into a substantial difference in final wealth. For a patient investor, this is a classic example of the value philosophy in action: paying a lower price for the same underlying basket of stocks.

Risk and return profiles, as measured by standard metrics, are remarkably similar. Both funds exhibit comparable Sharpe and Sortino ratios, with nearly identical Omega and Calmar ratios. Their maximum drawdowns and daily standard deviations are also in close alignment, suggesting they behave similarly through market cycles. This convergence underscores that for a value investor, the primary decision point is cost efficiency, not a fundamental shift in risk. The lower-fee VTV provides the same exposure to the value premium at a cheaper price, a clear advantage for long-term compounding.

The bottom line is that both funds are solid, low-cost options for gaining diversified value exposure. But for the investor who values every basis point of expense, VTV's lower fee structure offers a tangible, compounding benefit that aligns with the patient investor's long-term calculus.

Valuation and the Long-Term Compounding Engine

For the patient investor, the question of whether today's price offers a margin of safety is less about a single valuation metric and more about the cyclical nature of value itself. The historical case for the value premium remains intact, even after a period of severe underperformance. As the evidence shows, from 2011 to 2020, large value funds underperformed large growth funds by more than 5 percentage points each year. This lag, which culminated in a 32.2 percentage point gap in 2020, is a classic cycle, not a permanent flaw. The market's recent behavior-where growth stocks have surged-does not negate the long-term track record of value investing. The discipline is to recognize these periods as opportunities to deploy capital when the market's enthusiasm for growth has pushed valuations to extremes, creating a potential margin of safety for patient buyers.

The true engine of long-term wealth, however, is not the short-term price of a stock or an ETF, but the relentless power of compounding. Here, the cost of that compounding is everything. The difference between a 0.03% and a 1.5% expense ratio is not a minor detail; it is a direct subtraction from the return stream that compounds for decades. The evidence provides a stark illustration: a $10,000 investment growing at 7% annually in a fund charging 0.03% would be worth about 34% more after 30 years than the same investment charging 1.5%. This is the core of the value philosophy applied to fees: pay a lower price for the same underlying exposure, and let the difference compound into a substantial advantage over time.

For the disciplined investor, the choice is therefore less about timing a market cycle and more about consistent, low-cost access to the value premium. As noted, value ETFs confer instant portfolio diversification and provide a solution for those who want exposure without the difficulty of picking individual mispriced stocks. The patient investor's job is to focus on the mechanics of compounding-minimizing costs and maintaining a steady course. The lower-fee Vanguard Value ETF (VTV) exemplifies this approach, offering a broad basket of large-cap value stocks at a fraction of the cost of its peers. In the long run, the investor who consistently deploys capital into a low-cost, diversified value vehicle will compound their wealth more effectively than one who pays a premium for the same exposure. The margin of safety, in this view, is built into the math of time and cost.

Catalysts and Risks: What to Watch

For the patient investor, the path forward hinges on a few key factors that will validate or challenge the core thesis. The primary catalyst is a rotation back into value stocks, a pattern that has played out in past cycles. As the evidence shows, value stocks have drastically trailed growth stocks as low interest rates propelled the valuations of fast-growing companies. When those conditions reverse-whether through stabilization or a rise in interest rates that pressures growth valuations-value stocks often re-rate. This cyclical nature of performance is well-documented, with value outperforming in 2022 and 2023 before growth surged again in 2024. The market's recent behavior creates a potential setup for a return to favor, offering a classic opportunity for disciplined buyers.

The main risk is prolonged underperformance of the value factor itself. If the current growth dominance persists for an extended period, it would pressure the net asset values of these funds and test investor sentiment. This is not a new risk, but a recurring one that value investors must accept as part of the strategy. The funds' historical volatility, with maximum drawdowns near 60%, underscores the potential for significant short-term pain during these periods. For a patient investor, the key is to maintain a long-term perspective and avoid being shaken out by the noise.

Investors should also monitor the funds' operational mechanics. The evidence notes that the iShares Russell 1000 Value ETF (IWD) tracks the performance of the Russell 1000 Value Index, and both funds are designed to replicate their indexes as closely as possible. However, tracking error-the divergence between the fund's performance and its benchmark-can erode returns over time. While the funds' risk metrics are similar, any material change in their investment policies, such as a shift in the underlying index or a change in the use of derivatives, could impact their ability to deliver the value premium efficiently. The fund's stated policy of investing at least 80% in its index securities provides a baseline, but vigilance is warranted.

The bottom line is that the catalysts and risks are intertwined with the market's broader cycle. The patient investor's role is to focus on the durable advantages: low cost, broad diversification, and a long-term horizon. By doing so, they position themselves to benefit from the inevitable rotation back to value, while being prepared for the volatility that comes with it.