MGV ETF: Cost-Efficient Vanguard Fund For Diversification

Since my first In search of 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 nearly 3%. Buyers within the MGV ETF get low-cost (0.07%) and diversified publicity to the most important worth shares within the U.S. inventory market. The fund has a powerful long-term efficiency observe document (a 10-year common annual complete return of 11%+) as a result of many of those mega-cap “worth” firms additionally ship progress and earnings as properly. That being the case, traders who need to construct a well-diversified portfolio constructed for the long-term, and one that may climate difficult markets (like the present one), ought to contemplate the comparatively defensively positioned MGV ETF as a core portfolio holding.

Funding Thesis

My followers know I counsel traders to construct and preserve a well-diversified portfolio – and to carry it – via the market’s up-n-down cycles (strategically including on down-cycles). The MGV Mega-cap Worth is a superb 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, Vitality, and Financials sometimes outperform the broad market throughout occasions of inflation and better rates of interest. So, let’s take a more in-depth take a look at the MGV ETF to see the way it has positioned traders for fulfillment going ahead.

High-10 Holdings

The highest-10 holdings within the MGV ETF are proven beneath and weren’t taken instantly from the Vanguard MGV ETF homepage, the place you will get extra data on the fund, however had been taken through the use of the Vanguard Fund examine software to indicate 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 contemplate to be a well-diversified portfolio of 145 firms:

My first commentary as to the variations between the MGV ETF versus the everyday S&P500 fund is that the MGV portfolio holds solely 145 complete firms versus 500. That’s, the MGV ETF isn’t solely considerably extra concentrated as in comparison with the everyday S&P500 ETF, it’s extra concentrated in “worth”.

Secondly, gone are the everyday 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, notice that Berkshire presently 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 presently 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 charge and free-cash-flow profile, even a modest dividend would seemingly put GOOG into the “worth” class. Because of this Google continues to be my favourite large-cap inventory.

Nevertheless, though GOOG isn’t 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 In search of Alpha article late final month, Broadcom considerably beat consensus earnings estimates final Thursday resulting from “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 sturdy publicity to the vitality sector (and their dividends). I added Berkshire to that checklist as a result of, as you seemingly already know, BRK owns $27.6 billion price of Chevron inventory (its #3 holding and eight.3% of the Berkshire portfolio of shares) in addition to $11.9 billion price of Occidental Petroleum (OXY) (3.6% of the BRK portfolio).

Together with UNH, with the #8-10 holdings being big-pharma firms Merck (MRK), AbbVie (ABBV), and Pfizer (PFE), the health-care sector is properly represented within the MGV ETF. These three firms are sturdy 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 Vitality sectors:

For instance, the HealthCare sector presently represents 14.3% of the S&P500 whereas the vitality 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 Vitality ETF (XLE), respectively.

From a valuation perspective, the MGV ETF trades at a major low cost to the S&P500:

Click on to enlarge

That being the case, clearly the MGV ETF provides traders vital diversification as in comparison with the S&P500 – and the worth comparisons are much more favorable with respect to the Nasdaq-100.

Efficiency

The chart beneath exhibits 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 complete 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 will be seen within the chart, it is a fairly tight group for a 5-year comparability and the SPYV ETF gained by a nostril. A part of that is perhaps as a result of the SPYV ETF’s expense payment is 3 foundation factors decrease than MGV (0.04%).

Dangers

Whereas the MGV ETF has outperformed the S&P500 over the previous yr, that might change if the rate of interest outlook turns into extra favorable for progress. Meantime, the businesses within the MGV ETF aren’t immune from the headwinds of the worldwide financial system: excessive inflation – partly resulting from Putin’s horrific war-on-Ukraine that broke the worldwide vitality & 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 impression 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, notice 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 seem like prudent within the present setting. I reiterate my BUY on the MGV ETF, however counsel traders wanting to ascertain a place accomplish that by averaging into the fund over time (maybe so long as 3-6 months) so as 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.