Small-cap and value stocks have underperformed the market in recent years. Here's why that could change.
The major stock-market indexes are at or near their all-time highs, but there are still some areas of the market that look undervalued. Small-cap stocks are one such area. They're trading at their lowest valuations on a price-to-book basis, relative to their large-cap counterparts, in more than 25 years. Value stocks have also been major underperformers.
This isn't too surprising. Indexes like the S&P 500 and Nasdaq Composite are disproportionately reliant on megacap tech stocks, which have performed exceptionally well in recent years. Plus, interest-rate headwinds have put pressure on small caps and value stocks.
However, there's reason to believe that things are about to change. Here are three exchange-traded funds (ETFs) that could be great assets to add to your portfolio right now.
It isn't just a 2024 thing
First, it isn't just that we've seen small-cap and value stocks underperform this year. They certainly have, but it's more of a long-term trend. There are a few reasons for this, such as the incredible relative performance of large-cap tech stocks, which has driven the S&P 500's returns, and pressure from rising interest rates (more on that in a bit), but consider the relative performance:
Time Period | S&P 500 Total Return | Russell 2000 Total Return | S&P 500 Value Index |
---|
2024 YTD | 16.3% | 8.6% | 8.9% |
1 Year | 22.4% | 11.7% | 15.2% |
5 Years | 100.7% | 51% | 78.6% |
10 Years | 234.8% | 117.5% | 161.7% |
Data source: YCharts. Performance as of 7/20/2024. YTD = year to date.
Why small caps and value stocks could turn around
We've already seen a bit of an investor rotation into small-cap and value stocks in recent weeks, following inflation data that indicates a Federal Reserve interest-rate cut could be getting close. But this is a relative drop in the bucket, and as you saw in the above chart, the year-to-date gap is still pretty large.
There are a few reasons why small caps and value stocks could outperform as the Fed (hopefully) starts to lower interest rates. Just to name some of the big ones:
- There's a lot of investor money on the sidelines right now, sitting in Treasury securities, high-yield savings accounts, and certificates of deposit (CDs). As rates fall, these will become less attractive, relative to the stock market -- especially when it comes to dividend stocks, which disproportionately fall into the value-stock category.
- Small-cap and value stocks tend to use leverage (borrowed money) in their businesses to a greater extent than their large-cap and growth counterparts. Lower interest rates mean lower borrowing costs.
- When benchmark interest rates fall, it tends to cause yields from dividend-paying stocks to fall, as well. Since yield and share prices have an inverse relationship, falling rates tend to put upward pressure on stock prices.
3 ETFs that could be big winners
I don't think you need to do anything extraordinary to earn great returns here. In fact, my three favorite ways to invest in small caps and value stocks right now are low-cost Vanguard index funds:
- Vanguard Value Index Fund (VTV 0.14%): This fund has a rock-bottom 0.04% expense ratio and invests in a portfolio of about 340 (mostly large-cap) value stocks. Its top holdings include Broadcom, Berkshire Hathaway, and JPMorgan Chase, just to name a few examples.
- Vanguard Real Estate ETFs (VNQ 0.49%): Real estate has been one of the worst-performing parts of the value stock universe in recent years, as this group is exceptionally sensitive to interest-rate increases. This ETF invests in a broad index of real estate investment trusts, or REITs, and has a low 0.13% expense ratio.
- Vanguard Russell 2000 ETF (VTWO 0.12%): The Russell 2000 is an index of 2,000 small-cap companies and could be the best way to get broad exposure to this area of the market. No single company makes up more than 0.41% of the fund, which has a low 0.10% expense ratio.
Invest for the long term
I have absolutely no idea what these ETFs will do over the coming weeks or months. While they should get a nice boost as interest rates gradually normalize, there's no guarantee when that will actually happen.
It's also important to note that I love all three of these as long-term investments. While there's no way to know exactly how this situation will play out, consider that the last time small caps were this undervalued relative to large caps, they outperformed for more than a decade after. The point is that while this looks like a great entry point, these three ETFs could be fantastic long-term investments for those who buy shares now.
JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Matt Frankel has positions in Berkshire Hathaway, Vanguard Real Estate ETF, and Vanguard Russell 2000 ETF. The Motley Fool has positions in and recommends Berkshire Hathaway, JPMorgan Chase, Vanguard Index Funds-Vanguard Value ETF, and Vanguard Real Estate ETF. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
FAQs
10 best-performing Vanguard ETFs
Ticker | Company | Performance (Year) |
---|
MGK | Vanguard Mega Cap Growth ETF | 37.39% |
VONG | Vanguard Russell 1000 Growth Index ETF | 36.17% |
VUG | Vanguard Growth ETF | 35.26% |
VGT | Vanguard Information Technology ETF | 34.75% |
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Which Vanguard ETF is closing? ›
VFLQ-Vanguard U.S. Liquidity Factor ETF | Vanguard. Effective on or about November 28, 2022, the Vanguard U.S. Liquidity Factor ETF (VFLQ or ETF) will be liquidated.
What is Vanguard's best performing ETF? ›
Our pick for the best overall Vanguard ETF is Vanguard Total World Stock ETF. For a 0.07% expense ratio, Vanguard Total World Stock ETF offers a globally diversified exposure across over 9,500 stocks.
What is the fastest growing ETF Vanguard? ›
ETFs: ETF Database Realtime Ratings
Symbol Symbol | ETF Name ETF Name | YTD YTD |
---|
VUG | Vanguard Growth ETF | 15.67% |
VIG | Vanguard Dividend Appreciation ETF | 10.22% |
VGT | Vanguard Information Technology ETF | 15.09% |
MGK | Vanguard Mega Cap Growth ETF | 15.65% |
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Which Vanguard ETF pays the highest dividend? ›
ETFs: ETF Database Realtime Ratings
Symbol Symbol | ETF Name ETF Name | Annual Dividend Yield % Annual Dividend Yield % |
---|
VIG | Vanguard Dividend Appreciation ETF | 1.80% |
VYM | Vanguard High Dividend Yield Index ETF | 2.93% |
VYMI | Vanguard International High Dividend Yield ETF | 4.56% |
VIGI | Vanguard International Dividend Appreciation ETF | 1.85% |
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Which is Vanguard's best performing fund? ›
Best Vanguard Index Funds to Buy: Stocks
- Vanguard 500 Index Admiral/ETF VFIAX VOO.
- Vanguard Dividend Appreciation Index/ETF VDADX VIG.
- Vanguard European Stock Index/FTSE Europe ETF VEUSX VGK.
- Vanguard FTSE All-World ex-US Index/ETF VFWAX VEU.
- Vanguard FTSE All-World ex-US Small Cap ETF VSS.
- Vanguard FTSE Europe ETF VGK.
What happens to my ETF if Vanguard goes bust? ›
The securities that underlie the funds are held by a custodian, not by Vanguard. Vanguard is paid by the funds to provide administration and other services. If Vanguard ever did go bankrupt, the funds would not be affected and would simply hire another firm to provide these services.
Are Schwab ETFs better than Vanguard? ›
Overall, we found that Schwab is a great choice for self-directed investors and traders who want access to multiple platforms, plenty of tools, and full banking capabilities. Vanguard works well for buy-and-hold investors who may not be as tech-savvy and who want access to professional advice.
What is happening with Vanguard? ›
Vanguard announced that its Board of Directors has appointed Salim Ramji, a longtime financial services executive, as the Company's new Chief Executive Officer and a member of the Board, effective July 8, 2024. Mr. Ramji succeeds Tim Buckley, who, as previously announced, will retire and step down as Chairman and CEO.
What is the best Vanguard fund for a retired person? ›
- Vanguard Core Bond Fund Investor Shares (VCORX)
- Vanguard Growth and Income Fund Investor Shares (VQNPX)
- Vanguard Tax-Managed Balanced Admiral Shares (VTMFX)
- Vanguard High-Yield Tax-Exempt Fund (VWAHX)
- Vanguard Explorer Fund Investor Shares (VEXPX)
- Vanguard International Core Stock Fund Investor Shares (VWICX)
The best ETFs to buy now
Exchange-traded fund (ticker) | Assets under management | Yield |
---|
Vanguard Dividend Appreciation ETF (VIG) | $80.8 billion | 1.8% |
Vanguard U.S. Quality Factor ETF (VFQY) | $345.8 million | 1.3% |
SPDR Gold MiniShares (GLDM) | $7.7 billion | 0.0% |
iShares 1-3 Year Treasury Bond ETF (SHY) | $23.7 billion | 4.6% |
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What is the most aggressive Vanguard ETF? ›
Best Vanguard Funds for Aggressive Investors: Vanguard Explorer (VEXPX) Click to Enlarge If you want to turn up the growth potential and you want to go all-the-way aggressive, look no further than Vanguard Explorer (MUTF:VEXPX).
What are the Vanguard ETFs for 2024? ›
Top 50 Vanguard ETFs in 2024
Investment focus ETF | in 2024 | 3 Years |
---|
Equity Emerging Markets Vanguard FTSE Emerging Markets UCITS ETF Acc | +9.72% | -0.04% |
Equity Emerging Markets Vanguard FTSE Emerging Markets UCITS ETF Distributing | +9.67% | -0.07% |
Equity Europe Vanguard FTSE Developed Europe UCITS ETF (EUR) Accumulating | +9.64% | +22.39% |
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Which Vanguard fund has the highest return? ›
Top performing investment funds owned by Vanguard worldwide 2024, by one-year return. As of June 2024, the Vanguard Mega Cap Growth Index provided the highest one-year return rate. The Vanguard Russell 1000 Growth Index Fund ranked second having a one-year return rate of 36.3 percent.
What is the least volatile Vanguard ETF? ›
VFMV-Vanguard U.S. Minimum Volatility ETF | Vanguard.
What is the best performing ETF in last 5 years? ›
The Top 5 Best Performing ETFs of the Last 5 Years
What is the best ETF to buy right now? ›
The best ETFs to buy now
Exchange-traded fund (ticker) | Assets under management | Expenses |
---|
Vanguard 500 Index ETF (VOO) | $489.5 billion | 0.03% |
Vanguard Dividend Appreciation ETF (VIG) | $80.8 billion | 0.06% |
Vanguard U.S. Quality Factor ETF (VFQY) | $345.8 million | 0.13% |
SPDR Gold MiniShares (GLDM) | $7.7 billion | 0.10% |
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Which ETF gives the highest return? ›
100 Highest 5 Year ETF Returns
Symbol | Name | 5-Year Return |
---|
USD | ProShares Ultra Semiconductors | 57.42% |
FNGO | MicroSectors FANG+ Index 2X Leveraged ETNs | 52.76% |
ETHE | Grayscale Ethereum Trust (ETH) | 38.88% |
GBTC | Grayscale Bitcoin Trust | 36.80% |
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