The Best Vanguard ETF for a $500 Investment Right Now

Are you looking for the smartest way to invest $500 at this moment? One strong option to consider is a well-regarded Vanguard ETF that focuses on robust dividends and stock valuations that are currently at a deep discount.

Investing in traditional exchange-traded funds (ETFs) is usually a wise choice. For instance, your investment may grow steadily if you choose the Vanguard S&P 500 ETF (VOO -0.07%) or the SPDR Dow Jones Industrial Average ETF Trust (DIA -0.05%). Historically, these funds have provided solid long-term returns that can easily outperform typical savings and money market accounts. Even if you start your investment just before a significant market downturn, time generally works in your favor, allowing market-tracking index funds to yield favorable returns over the long run.

However, sometimes it might benefit you to take a more targeted approach with ETFs. For instance, I bought shares of the Vanguard Information Technology Index Fund ETF (VGT -0.21%) during the spring of 2022, as tech stocks appeared undervalued at that time. This decision proved successful when the artificial intelligence (AI) boom took shape shortly after. From that point until January 7, 2025, Vanguard's technology-focused fund outperformed many of the more traditional index funds.

Despite its past success, this technology fund might be experiencing a slowdown now. Given the high valuation ratios of its strongest performers, I am hesitant to invest further into the Vanguard IT fund and am considering reallocating some of my shares towards more reasonably priced alternatives.

The Changing Landscape of Value Investments

One particularly compelling choice for January 2025 is the Vanguard Mega Cap Value ETF (MGV -0.16%). I believe this ETF could be an ideal fit for anyone looking to invest in value and stability.

31 months ago, the Mega Cap Value ETF was not on my radar, and its total return during that time came in at just 31%, significantly trailing the market and the undervalued ETF I opted for instead. However, the landscape has changed dramatically since then. The rapid price increases of the so-called "Magnificent Seven" stocks have disrupted leading market trackers.

Currently, the Magnificent Seven stocks represent 34.3% of the value in the S&P 500 (^GSPC -0.03%). These tech stocks possess an average price-to-earnings (P/E) ratio of 46.4 and trade at an average of 8.8 times their sales (P/S) and 45.2 times their free cash flow (P/FCF).

It's important to note that these leading companies have earned their high valuations through strong performance. Their growth potential, particularly in AI and other emerging technologies, suggests that they have much to offer in the coming years. However, their elevated valuations imply that some of that future growth might already be reflected in their current stock prices. For growth-minded investors who don't mind paying high multiples during a boom, the Vanguard S&P 500 fund or the Information Technology ETF may still be pleasing options.

Your Best Option for Value Investing

This is where the Mega Cap Value ETF stands out. It includes some of the Magnificent Seven stocks, but they are represented to a much lesser extent, with none of them among its top 10 holdings. Instead, this fund emphasizes lower-priced leading businesses across a variety of sectors.

Here are the five largest holdings in this value-focused ETF:

Stock	Industry	Market Cap	Share of ETF Holdings
JPMorgan Chase	Banking and financial services	$690 billion	4%
Berkshire Hathaway Class B	Diversified insurance conglomerate	$981 billion	3.4%
UnitedHealth Group	Health insurance	$472 billion	3.2%
ExxonMobil	Energy	$481 billion	2.9%
Home Depot	Home improvement retail	$383 billion	2.4%

The fund maintains a diversified approach, with no single industry holding too much power. Currently, technology stocks represent just 11.6% of the total value, while financial services account for 25.2% and healthcare stocks for 18.9%. With an impressive $8.3 billion under management, this ETF comprises 136 different stock holdings.

The average P/E ratio of the ten largest holdings is a reasonable 23.2, with a modest average price-to-sales ratio of 2.3 and a price-to-free cash flow of just 21.1.

True to its name, the Mega Cap Value ETF emphasizes large, value-priced stocks. Moreover, it offers a 2.3% annual dividend yield, making it appealing for those seeking income along with growth.

Stability and Returns: Why the Mega Cap Value ETF is a Smart Choice

While the Vanguard Mega Cap Value ETF has not outperformed the market in recent years, it may be poised for stronger performance going forward. If you are not completely sold on this fund's historical returns, you might still appreciate its low volatility and attractive dividends.

For those looking for a solid foundation for a long-term value-oriented portfolio, this ETF's core components could potentially outpace the Dow Jones (^DJI -0.04%) and S&P 500 in the current market landscape, especially given moderate valuations.

So, if you have $500 to invest today, I would recommend considering the Vanguard Mega Cap Value ETF as a strong alternative to traditional ETF options.

investment, Vanguard, ETF