Two Vanguard ETFs Poised for Strong Gains

Investing in stocks and bonds has become easier with the emergence of exchange-traded funds (ETFs) over the past few decades. ETFs provide an effective way to diversify investments across various sectors or to focus on particular investment themes.

However, it is important to consider the costs associated with these funds, as they can vary widely. The typical expense ratio for ETFs stands at approximately 0.52%. This means investors are paying around $52 yearly for every $10,000 they invest. In stark contrast, Vanguard ETFs usually offer expense ratios that are 83% lower than the industry average, making them an appealing choice for those looking to minimize costs.

Let’s take a closer look at two Vanguard growth-focused ETFs that look set to outperform the S&P 500 over the next five years.

A Promising Small-Cap Opportunity

The Vanguard Small-Cap Value Index Fund (VBR) seeks to invest in mid-sized companies, with a median market capitalization of $7.5 billion, that exhibit signs of being undervalued. The aim of the fund is to match the performance of the CRSP U.S. Small-Cap Value index while maintaining a remarkably low expense ratio of just 0.07%.

Over the past decade, the Vanguard Small-Cap Value Index Fund has generated an annualized return of 8.94%. The fund currently holds shares in 835 companies across various industries. Key holdings include Smurfit WestRock plc, a leader in sustainable packaging, Builders FirstSource Inc., a major supplier of building materials, and Booz Allen Hamilton, a notable consulting firm.

Although the Vanguard Small-Cap Value Index Fund has performed decently in 2024, it has lagged behind the surging S&P 500, primarily due to the explosive growth of large-cap technology and biopharmaceutical stocks. As the Federal Reserve continues to lower interest rates, the economic landscape may become more favorable for small, growth-oriented companies.

Declining interest rates can lead to lower borrowing costs for businesses, potentially encouraging investment and growth. Moreover, reduced rates can boost consumer spending, which benefits smaller companies that depend on domestic demand.

The companies within the Vanguard Small-Cap Value Index Fund have shown impressive earnings growth, averaging 12.9% annually over the last five years, highlighting their strong potential. Additionally, the fund’s holdings boast an average price-to-earnings (P/E) ratio of 16.1, which is much lower than the S&P 500’s P/E ratio, which is close to 27.3. This comparison suggests that these smaller companies might be undervalued and could witness an increase in stock prices as investors start to recognize their growth potential.

Thus, the Vanguard Small-Cap Value Index Fund provides access to a diversified mix of undervalued growth prospects at an incredibly low expense.

A Strong Performer in Large-Cap Growth

The Vanguard Growth Index Fund (VUG) focuses on large mega-cap companies with a median market cap of $1.4 trillion that show above-average growth potential. This fund is designed to replicate the performance of the CRSP U.S. Large Cap Growth index with a very attractive expense ratio of 0.04%. The fund has produced a remarkable 10-year annualized return of 15.1%.

The Vanguard Growth Index Fund invests in 183 companies, predominantly in the technology sector. Some of its largest holdings are well-known giants such as Apple, Microsoft, and Nvidia.

This technology focus has led the Vanguard Growth Index Fund to slightly outpace the broader S&P 500 index this year. This trend of high performance is not new.

Over the last decade, the Vanguard Growth Index Fund has delivered total returns of 319%, based on reinvested distributions, compared to the S&P 500's return of 243% during the same timeframe, showcasing the fund's strong growth characteristics.

While the Vanguard Growth Index Fund does carry risks associated with growth investing, it has consistently demonstrated its capability to perform well in both bull and bear markets.

Investors seeking outsized gains may find the fund’s concentration on high-growth companies particularly appealing. Its ultra-low expense ratio further enhances its attractiveness by allowing investors to retain a larger portion of their gains over time.

Why These Two Vanguard ETFs May Outperform the Market

Both the Vanguard Small-Cap Value Index Fund and the Vanguard Growth Index Fund present exciting opportunities for investors aiming to enhance their growth portfolios. These ETFs not only have low fees but also significant potential for long-term appreciation.

The Vanguard Small-Cap Value Index Fund stands to gain from a favorable economic climate as interest rates fall, stimulating both consumer spending and investments in smaller companies. With a lower average P/E ratio than the S&P 500, these undervalued stocks have substantial potential for appreciation as the market begins to appreciate their growth trajectory.

Conversely, the Vanguard Growth Index Fund emphasizes large-cap companies with strong growth outlooks, particularly in technology. With ongoing innovation driving economic expansion, these businesses are likely to outpace the broader market. The fund’s historical track record of impressive returns reinforces its capacity to outperform the S&P 500 in the coming years.

ETF, Investing, Vanguard