Reviewed by Gotrade Internal Analyst
Value investing focuses on buying companies that appear undervalued relative to their fundamentals. Value ETFs package this approach into a diversified, low-maintenance format, making it easier for investors to gain exposure to value stocks without picking individual names.
Understanding what a value ETF is and how value ETFs work helps investors decide when and how this style fits into a long-term portfolio.
Understanding Value ETFs
A value ETF is an exchange-traded fund that holds stocks considered undervalued based on specific financial metrics. Value ETFs are built around valuation characteristics.
Instead of selecting companies manually, the ETF follows a rules-based index that screens for value characteristics.
These ETFs trade on stock exchanges just like individual stocks.
What makes a stock a “value” stock
Value stocks are typically identified using metrics such as:
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Low price-to-earnings ratios
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High dividend yields
The idea is that these companies are priced below their intrinsic value.
How Value ETFs Are Constructed
Value ETFs follow systematic selection rules.
Index-based screening
Most value ETFs track value-focused indexes.
The index applies predefined filters to a broad universe of stocks, selecting those that meet value criteria.
This rules-based approach removes emotion from stock selection.
Weighting methods
Value ETFs may weight holdings by:
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Fundamental factors like earnings or book value
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Composite value scores
Weighting affects concentration and performance behavior.
Ongoing rebalancing
Indexes rebalance periodically.
Stocks that no longer meet value criteria may be removed, while new value candidates are added. This keeps the ETF aligned with its style mandate.
Why Investors Use Value ETFs?
Value ETFs serve several portfolio purposes.
Exposure to value investing without stock picking
Value ETFs provide instant diversification across many value stocks.
This reduces single-stock risk compared to buying individual undervalued companies.
Potential downside resilience
Historically, value stocks have sometimes held up better during market downturns.
This is not guaranteed, but valuation discipline can provide relative stability during certain cycles.
Income component
Many value stocks pay dividends.
As a result, value ETFs often provide higher income than growth-focused ETFs.
Value ETFs vs Growth ETFs
Value and growth represent different investment styles.
Differences in valuation and expectations
Value ETFs focus on companies priced cheaply relative to fundamentals.
Growth ETFs focus on companies expected to grow earnings rapidly, often at higher valuations.
Performance cycles
Value ETFs tend to perform better during:
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Economic recoveries
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Rising interest rate environments
Growth ETFs often outperform during periods of low rates and strong earnings expansion.
Portfolio balance
Many investors hold both value and growth ETFs.
This balances style risk and reduces reliance on a single market environment.
Risks and Limitations of Value ETFs
Value investing is not risk free.
Value traps
Some stocks are cheap for a reason.
Companies with declining businesses or structural challenges may remain undervalued or deteriorate further.
Prolonged underperformance
Value ETFs can underperform for extended periods.
During strong growth-led markets, value strategies may lag broader indexes.
Sector concentration
Value ETFs may tilt toward certain sectors such as financials or energy.
This can increase exposure to sector-specific risks.
How Investors Use Value ETFs in Portfolios
Value ETFs can play different roles.
Core allocation
Some investors use value ETFs as part of a core equity allocation.
They complement broad market or growth-oriented holdings.
Tactical positioning
Others increase value ETF exposure during specific market conditions.
Rising rates or economic recoveries often draw attention to value strategies.
Long-term diversification
Holding value ETFs alongside other styles helps smooth performance over full market cycles.
Conclusion
Value ETFs offer a systematic way to invest in undervalued companies without relying on individual stock selection. By following rules-based indexes, they provide diversified exposure to value investing principles.
Understanding how value ETFs are constructed and when they tend to perform helps investors decide how this style fits into a balanced portfolio.
If you are comparing different equity styles, reviewing value ETFs available on the Gotrade app can help you see how valuation-based strategies behave alongside growth and broad market ETFs.
FAQ
What is a value ETF?
It is an ETF that invests in stocks considered undervalued based on financial metrics.
Do value ETFs pay dividends?
Many value ETFs pay dividends because value stocks often generate steady cash flow.
Are value ETFs safer than growth ETFs?
Not necessarily. They carry different risks and perform differently across market cycles.
Can value ETFs underperform the market?
Yes. Value strategies can lag for long periods depending on economic conditions.
Reference:
ETF.com, What is Value ETF, 2026.
Yahoo Finance, Why Value ETFs Investing Could Be A Smart Move Right Now, 2026.
Disclaimer
Gotrade is the trading name of Gotrade Securities Inc., which is registered with and supervised by the Labuan Financial Services Authority (LFSA). This content is for educational purposes only and does not constitute financial advice. Always do your own research (DYOR) before investing.
