VLUE: A Value ETF Through the Lens of Intrinsic Value and Competitive Moats

The investment case for a value tilt rests on a simple, enduring principle: buy a business for less than you believe it is worth. This is the essence of value investing, a discipline championed by Warren Buffett and Charlie Munger. It is not about chasing the latest trend, but about identifying companies trading at a discount to their intrinsic value, with the patience to wait for the market to recognize that gap.

The market's recent noise can obscure this long-term cycle. In 2025, growth stocks decisively outperformed their value counterparts. The S&P 500 Growth ETF returned 19.9%, while the S&P 500 Value ETF gained 12.3%. This performance gap, driven by a powerful second-half surge in tech and growth names, created a period of pronounced market noise. For a value investor, such short-term divergence is not a refutation of the thesis, but a reminder of the market's fickle nature. The key is to focus on the underlying business, not the quarterly rotation.

Historically, value has found its footing in specific economic environments. The style tends to outperform in the early stages of economic cycles, often coinciding with rising bond yields. This dynamic makes sense: as interest rates climb, the present value of a company's distant future earnings-critical for growth stocks-shrinks, while the immediate cash flows of more established, tangible businesses become relatively more attractive. Some analysts believe this decades-long downtrend in bond yields is over, which could favor a more level playing field for value stocks.

The setup for 2026 echoes the beginning of last year. After the late-2025 rally, concerns about elevated valuations have returned. With the S&P 500's CAPE ratio near 40, a level not seen since the dot-com bubble, the market may be pricing in a more muted future. In this context, a value strategy offers a potential buffer. It is not a prediction of an imminent rotation, but a positioning for a return to a more balanced cycle where the fundamentals of durable businesses are rewarded. The noise of 2025 may simply be the market resetting before the next long-term trend emerges.

Analyzing the Portfolio: Moats, Concentration, and the "Value" Label

The quality of a value fund is ultimately judged by the durability of the competitive advantages it owns. VLUE's portfolio, however, presents a complex picture that challenges a strict interpretation of the value mandate. The fund holds 154 individual stocks, a number that suggests broad diversification at first glance. Yet, its top five holdings account for over 26% of the portfolio, a level of concentration that introduces meaningful risk. In a market-cap-weighted index fund like VLUE, performance is disproportionately driven by its largest constituents, which may not align with a strategy focused on smaller, overlooked companies.

More critically, the fund's top holdings include major technology names like Micron Technology and Intel. These are not typically considered classic value stocks. Their business models are built on high intangible assets-intellectual property, research and development, and complex supply chains-that challenge traditional valuation metrics focused on tangible book value. While these companies may possess wide economic moats, their valuations are often more sensitive to growth expectations and interest rates than to the deep value discounts sought by a disciplined investor.

This structural characteristic creates a tension. VLUE is designed to track a market-cap-weighted index of U.S. large- and mid-cap stocks, which inherently favors the largest, most dominant companies. This means the fund's "value" label is applied to a basket that includes giants with significant intangible assets and high growth profiles. For a value investor, the focus should be on the margin of safety and the durability of the moat. The fund's composition suggests it may be more of a "large-cap" fund with a value tilt, rather than a pure play on deep-value, tangible-asset businesses. The concentration and the nature of its largest holdings mean investors are exposed to the volatility of these tech giants, even as they seek the perceived stability of a value approach.

Valuation, Sector Characteristics, and the Margin of Safety

The core of value investing is a margin of safety, a buffer between a stock's market price and its estimated intrinsic value. For a fund like VLUE, which targets stocks with lower Price-to-Book (P/B) ratios, the starting point is a comparison to sector norms. The benchmark for the broader U.S. market, excluding financials, shows an average P/B ratio of 5.10. This figure provides a baseline; a value strategy aims to identify companies trading below this level, suggesting their market price may not fully reflect their tangible net asset value.

Yet the portfolio's composition introduces a critical nuance. While the fund's index methodology favors lower P/B stocks, its largest holdings-companies like Micron Technology and Intel-belong to the Computers/Peripherals sector, which carries a staggering average P/B ratio of 34.08. This is a world away from the 5.10 market average. These are not traditional value stocks trading below book value. Instead, they are high-growth technology firms whose valuations are built on intangible assets like intellectual property, brand, and future earnings potential, not the physical assets that drive a simple P/B calculation.

This creates a fundamental limitation. The Price-to-Book ratio is a blunt instrument for companies where the balance sheet's book value is a poor proxy for economic value. For technology firms, the real competitive moat often lies in research and development, software, and complex supply chains-assets that are either expensed or under-valued on the balance sheet. Relying solely on a low P/B ratio to gauge value in such companies can be misleading. It dilutes the fund's overall margin of safety, as the largest positions are priced more on growth expectations than on tangible asset discounts.

Viewed another way, VLUE's portfolio represents a blend of value and growth characteristics. It holds a broad array of stocks across sectors, many of which may trade at reasonable P/B multiples. But its concentration in mega-cap tech giants means the fund's valuation profile is pulled toward the high end. The margin of safety, therefore, is not a simple average across the 154 holdings. It is a weighted average, heavily influenced by the premium valuations of its top names. For a disciplined value investor, this structural tension is the key takeaway: the fund's "value" label is applied to a basket that includes some of the market's most growth-sensitive and intangible-asset-heavy businesses.

Catalysts, Risks, and the Long-Term Compounding Horizon

The investment thesis for a value fund like VLUE hinges on a cyclical bet: a sustained rotation from growth to value stocks. The primary catalyst is a shift in market leadership, which would favor the fund's holdings. This dynamic has historical precedent. As bond yields rise, the present value of distant future earnings-critical for growth stocks-shrinks, while the immediate cash flows of more established businesses become relatively more attractive. Some analysts believe the decades-long downtrend in bond yields is over, which could favor value stocks. In this scenario, VLUE's portfolio of large-cap, tangible-asset-heavy businesses could find its footing.

Yet this is a cyclical bet, not a guarantee of compounding. The fund's structure introduces a key vulnerability. Its top holdings include major technology names like Micron and Intel, which belong to the Computers/Peripherals sector with a staggering average Price-to-Book ratio of 34.08. These are not traditional value stocks; their valuations are built on intangible assets and growth expectations. If the rotation to value occurs, these tech giants may not participate fully, limiting the fund's upside. The catalyst, therefore, must be broad-based, encompassing a rotation across the entire large-cap universe, not just a shift in style.

The most immediate risk is continued growth stock outperformance. In 2025, growth decisively beat value, with the S&P 500 Growth ETF returning 19.9% versus 12.3% for the value version. This performance gap pressured value funds and could lead to outflows, testing the fund's resilience. With the S&P 500's CAPE ratio near 40-a level not seen since the dot-com bubble-concerns about elevated valuations are returning. If growth stocks rally again, VLUE's relative returns would suffer, and the fund's concentration in mega-cap tech could exacerbate this underperformance.

For a disciplined investor, the focus should be on monitoring the earnings quality and sector rotation of the fund's top holdings, as well as broader market signals. Watch for signs that bond yields are stabilizing or rising, which could signal a more level playing field. Also, track the performance of the fund's largest positions; if they continue to lag on growth narratives, the fund's value tilt may remain a structural challenge. The bottom line is that VLUE offers exposure to a value cycle, but its composition means it is not a pure-play bet on deep-value, tangible assets. It is a large-cap fund whose performance will be judged by its ability to compound through the next market cycle, not by its ability to perfectly time a style rotation.