Unlocking Dynamic Value: How Strategic ETFs Outperform Traditional Benchmarks

In a market increasingly defined by volatility and shifting valuations, investors face a paradox: traditional value indices like the Russell 1000 Value or S&P 500 Value have struggled to keep pace with ETFs that actively target undervalued sectors or companies with improving fundamentals. This divergence highlights a critical opportunity: strategic ETFs are capitalizing on market inefficiencies, offering superior returns by identifying discrepancies between price and intrinsic worth. Let's explore how these funds are rewriting the rules of value investing.

The Case for Strategic ETFs: Outperforming Stagnant Benchmarks

Traditional value indices often rely on static metrics like low price-to-book ratios or high dividend yields. Yet, as sectors evolve, these metrics can lag behind operational improvements, sector shifts, or macroeconomic tailwinds. ETFs with active or rules-based strategies, however, dynamically reweight holdings to capture undervalued assets poised for growth.

Consider the Russell 1000 Value Index, which rose only 9.9% since 2022 while its growth counterpart surged 42.7% in 2023. Meanwhile, ETFs like the Fidelity High Dividend ETF (FDVV) and Vanguard Russell 1000 Value ETF (VONV) outperformed the index by leveraging dividend-rich sectors and small-cap opportunities.

Key ETFs Capitalizing on Market Discrepancies

1. Fidelity High Dividend ETF (FDVV): Sector Diversification Beyond the Index

FDVV's 13.6% annualized 5-year return outpaces the Russell 1000 Value Index by focusing on high-quality, undervalued firms across technology, energy, and industrials. Unlike the index's heavy tilt toward financials (23% of holdings), FDVV allocates 15% to healthcare and 8% to consumer discretionary, sectors Morningstar analysts highlighted as undervalued in 2025.

Why it works: FDVV's holdings like Microsoft (MSFT) and Exxon Mobil (XOM) combine stable dividends with secular growth drivers—cloud computing and energy transitions—missed by static indices.

2. Schwab U.S. Dividend Equity ETF (SCHD): Quality Over Quantity

SCHD's 19.6% 2024 return (vs. S&P 500's 28%) stems from its large-cap value tilt and strict dividend criteria. By excluding companies with inconsistent payouts, it avoids overvalued tech giants while emphasizing sectors like consumer defensive (20%) and energy (19%), which rebounded as inflation fears eased.

3. Brandes U.S. Value ETF (BUSA): Contrarian Active Management

BUSA's active strategy targets underfollowed small- and mid-cap stocks, often overlooked by passive indices. Its 18% financial services exposure and 14% tech stake reflect a focus on companies with improving margins. Analyst Joel Greenblatt noted in April 2025 that such firms in media and healthcare were trading at 13% below fair value, a gap BUSA exploits through low turnover and patient holding periods.

The Role of Expert Insights and Market Trends

Morningstar's April 2025 analysis emphasized that valuation spreads between growth and value stocks remain extreme, with small-caps at an 18% discount to fair value. This environment favors ETFs like Dimensional US Targeted Value ETF (DFAT), which focuses on mid- and small-cap value stocks. DFAT's 15% consumer cyclical exposure aligns with sectors poised for recovery as economic sentiment stabilizes.

Meanwhile, geopolitical risks (e.g., energy supply chains) have boosted demand for ETFs tied to natural gas (UNL) or defense tech (SHLD), which surged 27% and 24%, respectively, in 2025. These gains reflect sector-specific inefficiencies, not captured by broad value indices.

Strategic Implications for Investors

The outperformance of these ETFs underscores two truths:
1. Static indices are slow to adapt to evolving sectors, leaving gaps for active or rules-based strategies.
2. Undervalued assets with improving fundamentals—not just low prices—are key to long-term returns.

Investors seeking to rebalance toward dynamic value plays should consider:
- Allocating to ETFs with sector diversification beyond traditional indices (e.g., FDVV's tech/energy mix).
- Prioritizing quality over sheer yield, as seen in SCHD's strict dividend criteria.
- Embracing active management for small/mid-caps (e.g., BUSA), where inefficiencies are most pronounced.

Final Take: Seize the Inefficiency Gap

The market's current phase of volatility and sector divergence is a goldmine for ETFs that dynamically target undervalued opportunities. By focusing on improving fundamentals, sector nuances, and active management, these funds outperform benchmarks rooted in outdated metrics. For investors, this means rebalancing toward ETFs like FDVV, SCHD, or BUSA—not just chasing broad value indices—to capture the full spectrum of value-driven growth.

In a world where “value” is no longer one-dimensional, strategic ETFs are the compass investors need to navigate the next leg of growth.