3 Reasons to Buy the Vanguard Small-Cap Value Index Fund ETF Like There’s No Tomorrow
Vanguard offers several exchange-traded funds (ETFs) that have soared more than 20% over the last 12 months. But the Vanguard Small-Cap Value Index Fund ETF (NYSEMKT: VBR) isn’t one of them.
Perhaps many investors viewed this fund as boring. After all, it focuses on smaller stocks with attractive valuations instead of the high-flying tech stocks that have set the pace for the current bull market so far.
However, I suspect the opinions on this ETF are already changing. Here are three reasons to buy the Vanguard Small-Cap Value Index Fund ETF like there’s no tomorrow.
1. A rotation to small-cap stocks is underway
At long last, a major rotation to small-cap stocks appears to be underway. The Russell 2000 index, the widely followed benchmark for small-cap stocks, recently hit its highest level in nearly 2 1/2 years.
The performance over the past few weeks for the Vanguard Small-Cap Value Index Fund ETF reflects this rotation. The fund has taken off after delivering meager gains for much of the first half of 2024.
Fundstrat managing partner Tom Lee thinks the small-cap rally is just beginning. Lee told CNBC last week that small-cap stocks could soar as much as 40% in the coming months.
JPMorgan Chase is also bullish about small-cap stocks. The investment firm believes that tailwinds, including moderating inflation and sustained consumer spending along with the potential for the Fed to cut interest rates later this year, “could have long runways.”
2. The price is right
Another reason why I think the Vanguard Small-Cap Value Index Fund ETF is a screaming buy right now is that the price is right. And I mean that in two ways.
First, the stocks in the Vanguard ETF’s portfolio trade at an average of only 14.1 times their railing-12-month earnings. By comparison, the price-to-earnings ratio for the S&P 500 is nearly 27.5.
JPMorgan Chase’s wealth-management service wrote in late June that small-cap stocks traded “at a near-record valuation discount” to large-cap stocks. Even with the recent surge, that valuation gap remains large.
Second, the price of the Vanguard Small-Cap Value Index Fund ETF is attractive because of the bang for the buck investors get. For less than $200, you can own positions in 848 stocks in the CRSP US Small Cap Value index with this ETF. These stocks pay an average 30-day SEC yield of 2.1%. The annual expense ratio of the fund is a super-low 0.07%, only a fraction of the average expense ratio of 1.12% for similar funds.
3. History is on its side
Finally, history is on the side of the Vanguard Small-Cap Value Index Fund ETF. Why? Because history is on the side of small-cap value stocks.
Texas-based Bridgeway Capital Management analyzed stock returns from July 1926 through May 2023. It found that small-cap value stocks delivered an average annual return of 14.1%, versus 10% for the broader market.
Morningstar’s research yielded similar results. The big financial services firm concluded that small-cap value stocks easily outperformed all other types of stocks over the long run — small-cap growth, large-cap value, and large-cap growth.
I think the most compelling reason to buy the Vanguard Small-Cap Value Index Fund ETF like there’s no tomorrow is that there will be a tomorrow — and it’s likely to look like the past.
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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Keith Speights has positions in Vanguard Small-Cap Value ETF. The Motley Fool has positions in and recommends JPMorgan Chase. The Motley Fool has a disclosure policy.
3 Reasons to Buy the Vanguard Small-Cap Value Index Fund ETF Like There’s No Tomorrow was originally published by The Motley Fool
