Morningstar Magazine - October/November 2017 - 69

This is a fairly well-diversified portfolio consisting
of nearly 150 stocks, but it does have considerable exposure to the largest names in the portfolio.
The top 10 holdings represent about a third
of its assets. Market-cap weighting skews the
portfolio toward the largest value stocks,
which are not necessarily the cheapest. However,
this approach helps foster low turnover and reduce
risk. The fund's holdings tend to trade at
comparable multiples of forward earnings and
book value to the large-value category average.
Most of the sector weightings are also similar
to the category norm, though the fund has
more in the financial-services and health-care
sectors, and less in consumer cyclical stocks. Like
most of its peers, the fund tilts toward the
financial-services, utilities, and energy sectors. The
fund does not constrain its sector weightings
or make any sector-relative valuation adjustments.
CRSP's buffering rules, coupled with marketcap-weighting, have kept turnover low.
In each year from fiscal 2014 (the first full year the
fund tracked its current index) through 2016,
the fund's turnover fell in the single digits, which
was among the lowest in the category.
Portfolio Construction

The fund employs full replication to track the
CRSP U.S. Mega Cap Value Index. This broad,
market-cap-weighted index diversifies risk,
promotes low turnover, and accurately reflects the
composition of its target market segment,
supporting the Positive Process Pillar rating. CRSP

Style Map 08/31/2017

defines mega-cap stocks as those representing
the largest 70th percentile of the U.S. stock market.
It then assigns composite value and growth
scores to each of these stocks based on several
metrics. The growth metrics include projected
short- and long-term earnings per share
growth, three-year historical earnings, and sales
per share growth, current investment/assets,
and return on assets. CRSP evaluates value
on book/price, forward and trailing earnings/price,
dividend yield, and sales/price. It fully allocates
stocks with the strongest value characteristics
to the Mega Cap Value Index until it represents
half the assets of the mega-cap market. To
mitigate turnover, CRSP keeps 100% of each stock
in its respective style index until it passes
through a buffer zone. At that point, CRSP only
moves 50% of the stock from one style index
to the other. If the stock stays on the opposite side
of the buffer zone at the following quarterly
review, CRSP will transfer the other half.
Fees

Vanguard levies a rock-bottom 0.07% expense ratio
for this offering, making it one of the cheapest
large-value funds available. The managers
generate ancillary income for the fund through
securities lending, which partially offsets
the fund's expenses. As a result, the fund lagged
its benchmark by only 6 basis points annually over
the trailing three years through June.

of Silver. It extends its reach further down the
market-cap ladder. Otherwise, these two funds
apply the same portfolio construction approach.
Schwab U.S. Large-Cap Value ETF SCHV (0.04%
expense ratio) also reaches a little further
down the market-cap ladder. Like VTV, it targets
the cheaper half of the U.S. large-cap market and
weights its holdings by market capitalization.
Guggenheim S&P 500 Pure Value RPV (0.35%
expense ratio) offers a more exaggerated value tilt.
It applies more-demanding value selection
criteria and weights its holdings according to the
strength of their value characteristics. However,
S&P only rebalances this fund's index once a year,
so it can experience some style drift.
Dividend strategy funds, such as Silver-rated
Vanguard High Dividend Yield ETF VYM
(0.08% expense ratio), also offer a value tilt. This
fund targets stocks representing the higheryielding half of U.S. dividend payers and weights
them by market capitalization. Its index has
proved tough to beat.
Bronze-rated Schwab Fundamental U.S. Large
Company ETF FNDX (0.25% expense ratio)
weights its holdings on fundamental measures
of size, including sales (adjusted for leverage),
retained operating cash flow, and dividends plus
share buybacks. K

Alternatives

Vanguard Value ETF VTV (0.06% expense ratio)
is very similar and also carries an Analyst Rating

Alex Bryan, CFA, is director, passive strategies, manager
research, with Morningstar Research Services.

Top 10 Holdings 08/31/2017

Giant Large Mid

Centroid:
Weighted avg. of
equity holdings

Small Micro

Zone: 75%
of fund's equity
holdings

Stock

Weight (%)

Stock

Weight (%)

Microsoft Corp MSFT

5.87

Wells Fargo & Co WFC

2.54

Johnson & Johnson JNJ

3.74

Bank of America BAC

2.51

Exxon Mobil XOM

3.54

AT&T Inc T

2.51

Berkshire Hathaway Inc B BRK.B

3.53

Procter & Gamble PG

2.43

JPMorgan Chase & Co JPM

3.41

General Electric GE

2.32

Deep Value Blend Growth High
Value
Growth

global.morningstar.com/Morningstarmagazine

69


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