You wouldn't try to pound a nail with a screwdriver. Likewise, you wouldn't attempt to use a hammer to screw one part to another. Different tools are appropriate at different times.
It's a similar story with Vanguard exchange-traded funds (ETFs). Vanguard offers 88 ETFs to investors. Some are great picks during certain market conditions but not during others.
Which are ideal and not-so-ideal right now? Here are two Vanguard ETFs to buy hand over fist and one to avoid.
I think two Vanguard ETFs especially stand out as solid picks in today's market environment. One is the Vanguard S&P Small Cap 600 Value ETF (NYSEMKT: VIOV); the other is the Vanguard Small-Cap Value ETF (NYSEMKT: VBR). As their names indicate, both funds focus on stocks with smaller market caps and attractive valuations. However, they're not exactly the same.
The Vanguard S&P Small Cap 600 Value ETF attempts to track the performance of the S&P Small-Cap 600 Value Index. This index includes stocks in the S&P SmallCap 600 with low price-to-book-value, price-to-earnings, and price-to-sales ratios. The S&P SmallCap 600 index features 600 small-sized U.S. companies. The Vanguard Small-Cap Value ETF attempts to track the performance of the CRSP U.S. Small Cap Value Index, which also focuses on relatively smaller U.S. companies with low valuations.
One key difference between these ETFs is how they define which companies are small. The average market cap for the Vanguard S&P Small-Cap 600 Value ETF is $2.8 billion, compared to $7.5 billion for the Vanguard Small-Cap Value ETF.
The Vanguard Small-Cap Value ETF owns 836 stocks. That's a larger portfolio than the Vanguard S&P Small-Cap 600 Value ETF, which owns 460 stocks.
While all Vanguard ETFs are usually cost-effective compared to rival funds, some are cheaper than others. The annual expense ratio of the Vanguard Small-Cap Value ETF is 0.07%, lower than the expense ratio of 0.11% for the Vanguard S&P Small-Cap 600 Value ETF.
Over the long term, small-cap stocks have outperformed large-cap stocks. And small-cap value stocks have outperformed all other equity investments. This historical track record provides one good reason to buy these two Vanguard ETFs.
Sure, large-cap stocks have been bigger winners overall in recent years. But the picture has changed over the last few months. Why? I think one factor is that the valuation gap between large-cap and small-cap stocks simply became too large. We could be seeing the beginning of a reversion to the mean.
Another important reason for buying these two Vanguard small-cap value ETFs now is that the Federal Reserve has at long last started to lower interest rates. Small-cap stocks tend to perform well when rates are declining.
In addition, higher tariffs could be on the way. President-elect Trump has promised to impose tariffs of 10% to 20% on all imports to the U.S. and significantly higher tariffs on products imported from some countries. These tariffs could benefit some smaller companies. Also, many smaller companies wouldn't be hurt by retaliatory tariffs imposed by U.S. trading partners because they don't have much exposure to international markets. These factors could make small-cap stocks more appealing to investors compared to large-cap stocks.
While these two Vanguard ETFs should be good choices for investors as 2025 approaches, another Vanguard ETF should probably be avoided: the Vanguard Ultra-Short Bond ETF (NYSEMKT: VUSB). This ETF owns short-term, investment-grade bonds.
Why avoid this Vanguard ETF? When interest rates fall, bond prices rise. However, longer-term bond prices jump more than bonds with short durations. As a result, investors will find longer-term bond ETFs more attractive than the Vanguard Ultra-Short Bond ETF in the current market environment.
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*Stock Advisor returns as of December 2, 2024
Keith Speights has positions in Vanguard Small-Cap Value ETF. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.