Investors are discovering the value of value ETFs
March 18, 2025
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6 min read
Investing is not merely about allocating money into assets and hoping for the best return. It should be a strategic process that requires careful consideration of various styles and philosophies. Among these, the value style of investing stands out as a particularly compelling approach. While growth-style investing focuses on companies with high potential for future expansion – and has benefits, too – value investing centers on identifying undervalued stocks that have solid fundamentals but are currently out of favor with the market.
Value investing is typically grounded in the principle of buying securities that appear underpriced by some form of fundamental analysis, relative to their intrinsic value. This dispersion between the current market price and intrinsic value can be attributed to various factors including market inefficiencies, investor sentiment and short-term fluctuations.
Investors who espouse the value style look for stocks that are trading for less than their intrinsic value, with the expectation that the market will eventually recognize their true worth. When the market does that, investors can enjoy significant returns. This approach often involves a contrarian attitude, requiring patience and a long-term perspective.
What would Warren Buffet say…
Warren Buffett, one of the world’s most successful value investors, famously said, "Price is what you pay. Value is what you get." This quote underscores the core principle of value investing – focusing on the intrinsic value of a stock rather than its current market price.
Another notable quote from Buffett is, "Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down." As we look at the recent performance of the US stock market, one might think this value sentiment has been left behind, but when will investors again recognize the value of value investing? Historically, they always have.
Value is about finding value, but how does this compare to growth investing?
Growth investing focuses on companies that are expected to grow at an above-average rate compared to other firms. These companies typically reinvest earnings into expansion projects, research and development, and acquisitions.
Growth investors are less concerned with the current price of a stock, relative to its intrinsic value, and more interested in the potential for future earnings. High-flying tech companies often exemplify growth stocks – which can offer substantial returns during favorable market conditions – but can correct sharply when they fall out of favor.
What would Bill Nygren say…
Bill Nygren, a prominent value investor and portfolio manager at Harris | Oakmark, has emphasized the advantages of value investing. "Investing in businesses when their stock prices are low, relative to their intrinsic values, provides a margin of safety and an opportunity for significant returns when the market eventually corrects," he says.
Value investing often involves selecting stocks that are currently out of favor with the market. These stocks may be undervalued due to temporary setbacks, negative news or broader market trends. While these factors can present challenges, they also create opportunities for savvy investors, such as Nygren, to capitalize on market inefficiencies. Patience and discipline are crucial, as the market can take time to recognize the true value of these investments.
What does the history of the US stock market teach us about value and growth investing?
The price-to-earnings (P/E) ratio is a critical and an easy-to-understand metric for comparing value and growth stocks. Historically, value stocks have traded at lower P/E ratios compared to growth stocks.
For example, in the late 1990s, during the dot-com bubble, the P/E ratios of growth stocks were significantly higher than those of value stocks, often exceeding 30, while value stocks traded at P/E ratios below 15. This disparity highlighted the high expectations placed on growth stocks and the relatively conservative expectations for value stocks. When markets no longer preferred “paying up for growth,” these growth companies’ prices fell rapidly and dramatically, whereas value-style companies lost far less, offering a smoother, less volatile experience.
In recent years, this trend has persisted, with growth stocks continuing to command higher P/E ratios. Throughout much of 2024, the average forward P/E ratio for growth stocks in the S&P 500® Index was approximately 28, while value stocks had an average forward P/E ratio of approximately 15.1
This ongoing difference underscores the market's optimistic outlook for growth stocks and the more cautious stance toward value stocks. However, it also indicates potential opportunities for value investors to find undervalued stocks with solid fundamentals.
A contrarian investor is often seen as a successful investor
Value investing inherently involves a contrarian mindset – buying when others are selling and vice versa. This contrarian approach can lead to strong returns, as it often involves purchasing stocks at a discount during periods of market pessimism.
Over time, as market sentiment shifts and the true value of these stocks is recognized, investors can reap substantial rewards. Historical data supports the notion that value investing can outperform growth investing over long periods.
Market sentiment shifts fast, so owning growth and value mitigates risk
Over the years, owning both growth and value stocks has been an approach most smart asset allocators have used.
To quantitatively support this point, we looked at Natixis Investment Managers Solutions’ anonymized data from more than 6,000 financial advisors’ asset allocation models. We focused on their US stock allocations, which, of course, include a mix of both growth and value stocks. In looking at the data, these financial advisors currently average 47% in growth-style bias stocks and 28% in value-style bias stocks – so indeed, they own a mix. These allocations have ranged from 14% to 62% in growth, and 19% to 65% in value over the past decade.2
How can investors add more dedicated value style to their portfolios?
One way investors can add value investments to their portfolios is through an active, value-oriented ETF.
One notable example of this type of ETF is the Oakmark U.S. Large Cap ETF (OAKM). Managed by Harris I Oakmark in Chicago, Illinois, OAKM focuses on identifying undervalued companies with strong fundamentals.
According to Harris I Oakmark, OAKM's portfolio will typically include 30–40 stocks that are selected based on rigorous fundamental analysis and a long-term investment horizon. This ETF exemplifies the principles of value investing, offering investors exposure to a range of undervalued assets while maintaining a focus on risk management.
When asked what his favorite new ETF launch of 2024 was, Morningstar’s Ben Johnson noted it was OAKM.
“For the sake of efficiency here, I’m going to combine my favorite new ETF entrant with my favorite new ETF launch and put a vote in for the hometown team here from Chicago in Oakmark with OAKM,” Johnson said. “I think OAKM just is representative of everything investors are looking for from an actively managed ETF: a proven team, proven process, incredible track record wrapped up in a bundle that's more compatible with how they're allocating their clients assets these days that's going to be more fee efficient, more tax efficient. I think OAKM, in many ways, is reflective of exactly what investors want, expect, deserve from actively managed ETFs.”3
What’s the main point again?
Value-style investing remains a compelling approach for those seeking to capitalize on market inefficiencies and achieve sustainable, long-term returns. By focusing on undervalued assets, prioritizing true value and embracing a contrarian mindset, value investors can navigate market volatility and enjoy lower risk compared to their growth-oriented counterparts.
While value investing may periodically fall out of favor, its enduring principles and proven track record make it a valuable strategy for those willing to invest with patience and discipline. Financial advisors have enjoyed success over the years by complementing their growth investments with value investments. Portfolio Manager Bill Nygren’s OAKM ETF is a compelling example of an ETF that can provide investors value exposure in their portfolios.
