Thesis
The Vanguard Mega Cap Value ETF (NYSEARCA:MGV) is an equities exchange traded fund from Vanguard that aims to track the performance of the CRSP US Mega Cap Value Index, which measures the investment return of the largest-capitalization value stocks in the US market. With over $6 billion in assets under management, MGV provides diversified exposure to the largest value stocks in the US.
2023 has been a year dominated by tech mega-caps, with the Vanguard Mega Cap Index Fund (MGC) experiencing significant growth. However, MGV has had a more modest performance, indicating a potential shift in market trends for 2024. While tech has outperformed other investments this year, we believe that tech valuations are stretched and that expectations for future returns may not be met.
Large value companies, represented by MGV, offer a cheap entry point for investors with a low P/E ratio of 15.7x. Buying equities at a low valuation ensures potential multiple expansion during a bull market, making value large cap stocks an attractive investment option. On the other hand, tech mega-caps have high P/E ratios, indicating overvaluation.
In addition, a higher interest rate environment favors large cap companies with investment grade rating profiles and termed-out debt maturity profiles. Small cap stocks, on the other hand, may be more negatively affected by changes in interest rates. While small caps are expected to outperform in the future, we anticipate this to occur in 2025 and beyond, as we do not foresee a significant decrease in the cost of funds in the near future.
Analyzing MGV’s historic performance, the fund has consistently delivered robust long-term results, outperforming during normalized economic cycles and market sell-offs. With the expectation of the Fed lowering Fed Funds in mid-2024, MGV is well-positioned to take advantage of its robust fundamentals and attractive valuation starting point in 2024 and 2025.
In conclusion, MGV offers investors an opportunity to capitalize on the potential shift from tech mega-caps to value large cap equities in 2024. With its low valuation, solid balance sheet, and funding profiles, MGV presents an appealing investment option. Furthermore, in an elevated interest rate environment, we believe large caps will continue to outperform.
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