Vanguard offers a variety of low-cost products exchange traded funds (ETF) for stocks, bonds, asset mixes, etc. ETFs can be a simple and straightforward way to achieve diversification and invest in a way that fits your financial planning goals.

Here is why the Vanguard Value ETF (VTV -0.70%), Vanguard Mega Cap Value ETF (MGV -0.74%)And Vanguard High Dividend Yield ETF (VYM -0.81%) stand out as the three best funds to buy now for people looking to generate passive income.

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Vanguard Value ETF

With $261 billion in net assets, the Vanguard Value ETF is one of the largest low-cost value-focused ETFs. The fund targets large-cap value stocks across 336 stocks, many of which pay dividends.

If you follow Vanguard funds, you may be familiar with the Vanguard Growth ETF (NYSEMKT:VUG). The Value ETF and the Growth ETF are two sides of the same coin, with the Growth ETF focusing less on valuation and dividends and more on earnings growth. Here’s a look at the top 10 Value ETF holdings.

Data source: Vanguard.

Right off the bat, you’ll notice that the fund doesn’t hold well-known mega-cap growth stocks like Apple, Microsoft, Nvidia, Alphabet, Amazon, MetaplatformsOr Tesla – all of which are the top holdings of the Vanguard Growth ETF. The Value ETF’s top 10 holdings make up just 21.3% of the fund, in stark contrast to the Growth ETF, which has a whopping 59% concentration in just 10 stocks. Even the Vanguard S&P 500 ETF has only 36% of its holdings in its top 10 names.

Even without the help of top growth stocks, the Vanguard Value ETF has returned an impressive 21.1% year to date, barely lagging the total return of 24.3%. of S&P500. This strong performance shows that valuable companies are not just income stocks. In fact, many value stocks have been reach unprecedented heights.

With an expense ratio of just 0.04%, or just $4 for every $10,000 invested, a price/earnings ratio (P/E) of 19.9 and a dividend yield of 2.3%, the Vanguard Value ETF offers a way to invest in industry-leading companies while avoiding growth stocks that are priced high and low dividend yields.

Vanguard Mega Cap Value ETF

The Vanguard Mega Cap Value ETF is a concentrated version of the Value ETF with slightly higher fees at a 0.07% expense ratio. With 136 stocks, the fund essentially takes the largest companies in the Value ETF and leaves out the other 200 stocks. Its top 10 holdings have the same names as the Value ETF, but with a collective weighting of 26.5% instead of 21.3%.

Still, even with this high concentration, the fund is much less top-heavy than Vanguard’s growth-oriented funds. For example, the Vanguard Mega Cap Growth ETF has a a staggering 62.7% weighting in just 10 names.

The Mega Cap Value ETF’s holdings are well distributed across a variety of sectors. Compared to the S&P 500, the fund places less emphasis on communications and technology and more on value-oriented sectors like industrials, consumer staples and energy. For example, 33.2% of the fund is dedicated to health, basic consumer goods and public services. These sectors tend to be resistant to recessions and are less dependent on economic cycles.

With a P/E of 20.8 and a yield of 2.3%, the fund has a similar valuation and passive income profile to the Vanguard Value ETF, making it an excellent choice for investors who instead want focus on the leading value companies in the sector. rather than including hundreds of names they may not even recognize.

Vanguard High Dividend Yield ETF

The Vanguard High Dividend Yield ETF has 537 holdings, a P/E of 18, a dividend yield of 2.8%, and an expense ratio of 0.06%. This is Vanguard’s third and best-performing low-cost equity-focused ETF. The only two higher-yielding equity funds are sector ETFs: the Vanguard Energy ETF and the Vanguard Utilities ETF.

For investors looking for a fund yielding close to 3%, which is highly diversified and not focused on a single sector, the Vanguard High Dividend Yield ETF is by far the best choice.

Unlike other income-oriented ETFs, where passive income is the priority, capital gains have historically accounted for a higher share of the high dividend yield ETF’s total return than dividends. This fund does not invest in very high yielding companies with limited growth prospects.

In fact, it has the same top 10 holdings as the Value ETF and Mega Cap Value ETF, except it swaps UnitedHealth and Berkshire Hathaway (which doesn’t pay dividends) for Merck And Coca-Cola.

Over the past five years, the three ETFs shown above have lagged the S&P 500, which makes sense because the S&P 500 has been heavily driven by major technology stocks. But these funds have still produced phenomenal returns for patient investors, nearly tripling their money in total returns over the past decade.

^SPX data by Y charts.

As you can see in the chart, the more concentrated Mega Cap Growth ETF outperformed the Value ETF, which outperformed the High Dividend Yield ETF.

When selecting an ETF to buy and hold for the long term, it’s best to choose the fund that best fits your risk tolerance and preferences. The three ETFs discussed can be excellent sources of passive income while also allowing you to participate in high-value, value-oriented companies.

Investors who want to bet on the biggest and best companies may prefer the Vanguard Mega Cap ETF, while others looking for more diversification and a higher yield might choose the Vanguard High Dividend Yield ETF.