These ETFs Thought Broadcom Was Cheap. It Just Got Cheaper -- WSJ

Dow Jones09-07

By James Mackintosh

Broadcom shares are down more than 9% today, and since the chipmaker is far more expensive than other big stocks, value investors should be taking this as a win and muttering about hubris before getting back to their balance sheet analysis. Not so fast. It turns out the biggest "value" ETF not only owns Broadcom, but has it as its largest holding.

This is, to put it mildly, odd. The point of value investing is to buy cheaper stocks, betting that eventually they will shine. Broadcom is very far from cheap: it trades on a forward price-to-earnings ratio of 27, far above the S&P 500's 21, and a price-to-book ratio of 11, against the S&P's 4.

Yet Broadcom is the biggest holding of the $177 billion Vanguard Value ETF (ticker VTV), which tracks the CRSP U.S. Large Cap Value index. It is also the biggest holding of MSCI USA Value, which is bad news for a UBS ETF which tracks it.

However, Broadcom is missing from two iShares value ETFs from Blackrock that are linked to MSCI value, as they use variants of the index with different methodologies.

Broadcom is absent from the Russell 1000 value index that underlies a lot of ETFs, including the Dimensional US Large Cap Value ETF. It's also missing from the very odd S&P 500 value index (more on how its weird construction allowed it to hold growth stars such as Microsoft here).

Investors who found their ETF held Broadcom can reasonably query why such an expensive stock is treated as somehow cheap enough to make it into a value index. To find out they will have to dig far into the methodology of index construction, because there's no common definition of value (or, for that matter, growth, momentum, quality or ESG). The lesson, once again, is how little you learn by looking only at the name of an ETF, or even an index.

This item is part of a Wall Street Journal live coverage event. The full stream can be found by searching P/WSJL (WSJ Live Coverage).

(END) Dow Jones Newswires

September 06, 2024 13:00 ET (17:00 GMT)

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These ETFs Thought Broadcom Was Cheap. It Just Got Cheaper -- WSJ

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