Vanguard Mega Cap Value Index provides a market-cap-weighted portfolio of the cheapest companies in the mega-cap market. Its razor-thin expense ratios on each share classes make them compelling choices. Its institutional and exchange-traded fund share classes earn a Morningstar Analyst Rating of Silver.
The fund tracks the CRSP US Mega Cap Value Index, which captures the cheaper side of the mega-cap market. Value stocks are usually characterized by low price/book and low price/earnings ratios. Depressed valuations may be due to slow earnings growth, poor fundamentals, or dim future prospects. While these may not be the most exciting firms, the low expectations implied by their low valuations should be easier to beat.
Market-cap weighting is an efficient way to weight holdings because it harnesses the market's consensus opinion of each stock’s relative value. Stocks that grow in size take up a larger share of the portfolio, while smaller companies that may be struggling will have less importance. Generous buffers around the fund's size and style constraints improve the breadth of the portfolio and help tame turnover.
Some of the fund’s peers include mid-cap stocks, but this fund's parent index, the CRSP US Mega Cap Index, excludes them. Market-cap weighting would give those relatively smaller firms little prominence but omitting them frees up more of the allocation to focus on the largest stocks in the market. This has pushed its average market cap above $150 billion--$41 billion more than the category average, as of Jan 31, 2023. An emphasis on larger companies may hold it back when smaller stocks rally but should partially insulate the portfolio when markets sour since mid-cap stocks can be more volatile.
The portfolio remains well-diversified, and it is a good representative of the category despite cutting out the smaller end of the opportunity set. None of its 145 holdings garners more than 4% of assets, with its top 10 holdings representing 26% of the portfolio as of Jan. 31, 2023. Most key value metrics closely follow the category average and sector allocations largely resemble the Morningstar Category average, with a few differences. Healthcare stocks lead the way, accounting for 23% of the portfolio, 7% more than the typical peer. Consumer cyclical stocks make up the difference by collecting 6 percentage points less than a typical peer. 
Performance has been strong since the fund started tracking its current index in April 2013 through Feb. 28, 2023. It has outperformed its average category peer by more than 1.7 percentage points annually. Volatility has also been muted relative to the category thanks to its larger orientation, allowing the fund to post an even wider risk-adjusted-return advantage.

Analyst Rating

A compelling large-value fund

Associate Analyst

Zachary Evens

Berkshire Hathaway Inc. - Ordinary Shares - Class B

Exxon Mobil

UnitedHealth Group

JPMorgan Chase & Co

Johnson & Johnson

Broadcom

Procter & Gamble

Chevron

Merck

AbbVie

The strategy gives greatest emphasis to the largest and most stable stocks in the large-cap value market segment. Additionally, market-cap weighting is an efficient approach, allowing investors to harness the market's collective wisdom for a low fee. It earns an Above Average Process Pillar rating.
The CRSP US Mega Cap Index includes the largest 70% of U.S. stocks by total market cap. CRSP buckets each eligible constituent into a distinct growth or value index based on their composite style score. Each index weights constituents by float-adjusted market cap. The value index collects those landing in the cheaper half of the opportunity set. Stocks that land near the value/growth border may have their market cap split across value and growth indexes, but such instances are rare: The mega-cap growth and value indexes share about 4% of their holdings.
Generous buffer rules and trading windows help tame turnover and the associated trading costs. For a holding to move into an adjacent index, its style traits or market-cap must change considerably. Should that occur, the fund initially trades 50% of the stock's market cap to protect against one-off fluctuations. This has put a lid on turnover, which has averaged just 8% annually since 2014. CRSP spreads trades over five days to mitigate market-impact costs at each quarterly rebalance. These unique steps should reduce unnecessary turnover and marginally improve returns over time.

Above Average

Process

Vanguard Equity Index Group boasts seasoned managers and a dedicated supporting staff well-equipped to provide tight index-tracking, earning it an Above Average rating.

Gerard O’Reilly and Michelle Louie are the named managers on this strategy. O’Reilly, a Principal at Vanguard, has been with the firm since 1992. Louie joined the firm in 2010 and has worked in investment management since 2011. She replaced Michael Johnson on this strategy in July 2021 as he moved to a different role within the firm. Vanguard frequently rotates its managers to promote breadth and depth across the team.

The managers are responsible for the fund’s trading, providing more portfolio insights than a stand-alone trader. They are supported by a global team of dedicated personnel and sophisticated, scalable technology that optimize precision and reduce managers’ workload. Its independent risk-management team works closely with the managers to monitor trades and review any potential issues. Managers’ compensation is tied to performance using a combination of tracking error and excess return metrics, which aligns their interests with investors’.

People

The Vanguard Group retains a High Parent rating. 

Mutual ownership, low costs, and a direct-to-investor playbook have helped spur Vanguard's leadership within the United States. Client service missteps notwithstanding, Vanguard over the past decade has grown its market share of U.S. open-end and exchange-traded fund assets at about a 5% annualized clip. At that rate, Vanguard's portion of the U.S. industry will cross 50% around 2035.

True, some competitors can now match or even undercut Vanguard on fees for broad market exposure. But Vanguard's burgeoning advice business could help it keep or even extend that lead. Through Digital Advisor and Personal Advisor Services, Vanguard has built an increasingly compelling ecosystem of advice for investors with simple to complex needs.

Vanguard is also using its advice business to expand overseas, but that's a work in progress. Of Vanguard's USD 7.6 trillion in global assets under management in March 2023, non-U.S. investors owned less than 10%, a figure that has changed little in recent years. Strategic shifts in China and other markets account for the slow pace, including returning money to institutions that had been layering on fees. Vanguard hopes to recoup that money and more by focusing on individual investors and the advisors who serve them. Provided Vanguard sticks to its playbook, its advantages should translate into success abroad, too.

High

Parent

Vanguard Mega Cap Value ETF

MGV tracks the CRSP US Mega Cap Value Index. The index selects from stocks in the top 70% of market capitalization based on multiple value factors.

The fund tracks an index of mega-cap stocks in the US. Holdings are selected and weighed based on five value factors.

Launched on 12/17/2007, the Vanguard Mega Cap Value ETF (MGV) is a passively managed exchange traded fund designed to provide a broad exposure to the Large Cap Value segment of the US equity market.

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The Vanguard Mega Cap Value ETF is outperforming the broad market averages after #1 holding Berkshire Hathaway announced strong Q2 earnings on Saturday. The MGV ETF invests in undervalued stocks, trading at a discount to the S&P500, and has outperformed the index over the past 3 years. With a low expense fee (0.07%) and attractive yield (2.45%), the MGV ETF is an attractive option for investors looking to build a well-diversified portfolio.

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With the advent of the 2022 bear market, and the end of near 0% interest rates, "value" investing has become more popular - and more rewarding. The Vanguard Mega Cap Value ETF is a cost-efficient way for investors to gain exposure to the largest value stocks in the market.

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The Vanguard Mega Cap Value ETF has outperformed the S&P 500 by ~16% over the past year. The top-4 holdings are UnitedHealth Group, J&J, Exxon, and Berkshire Hathaway. The expense fee is only 0.07% while the average 10-year annual return is a solid 12.6%.

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