Finance
These three Vanguard ETFs will double investors’ money within five years
Despite rising interest rates and fears of a recession, the stock market continued to deliver solid performance. Over the past year, the S&P 500 is up 24%.
However, much of the strong performance has been driven by growth stocks, particularly the mega-cap variety. Value stocks, small-cap stocks and real estate investment trusts (REITs) have all dramatically underperformed the overall market. But I think that’s going to change. Here’s a look at the underperformance, why the next few years could be great for investors in these parts of the market, and three ETFs that have the potential to double investors’ money over the next five years.
Three groups of underperforming stocks
To put it mildly, it’s been a long cycle of outperformance for large-cap stocks, and mega-cap tech stocks have fueled much of the market’s gains. Here’s a comparison of the performance of the S&P 500, value stocks, small-cap stocks, and real estate stocks over a number of different time frames.
|
Index/type of shares |
Total return over 1 year |
Total return over 5 years |
Total return over 10 years |
|---|---|---|---|
|
S&P500 |
23.6% |
101.4% |
235.5% |
|
Russell 3000 Value (value stocks) |
13.5% |
60.6% |
126.2% |
|
Russell 2000 (small cap) |
10.5% |
48.4% |
110.4% |
|
Real estate sector |
14.2% |
21.4% |
78.8% |
Data source: YCharts. Performance as of 08/14/2024.
Catalysts on the horizon
While there are several reasons for the performance gap between these groups of stocks, including the surge in AI investment that has fueled big tech stocks, one big reason is interest rates.
Value of sharessmall caps and real estate shares are generally more interest rate sensitive than large caps. First, they tend to be more dependent on borrowed money (debt) than the largest companies in the market, and interest rates affect financing costs.
In addition, stocks in these three groups are more likely to pay dividends (especially value stocks and real estate stocks), and as money has flowed out of the stock market into risk-free assets such as government bonds and CDs in recent years, stocks in these three groups have become more likely. groups are the main victims of this outflow. As interest rates fall and investors return money to the market, these groups could benefit greatly.
The latest market expectation is that the Fed will cut rates quite aggressively starting from its September meeting. By means of next The average forecast for September calls for a total of 2.25 percentage points of Fed rate cuts CME Group‘s FedWatch tool. And I think all three stock groups discussed here will be big winners.
Three ETFs I’m buying
You don’t have to buy individual value, small-cap, or REIT stocks to benefit from these tailwinds. In fact, there are three ETFs that I bought or plan to buy in 2024 that I think could double investors’ money over the next five years. They are:
-
Vanguard Value ETF (NYSEMKT: VTV)
-
Vanguard Russell 2000 ETF (NASDAQ: VTWO)
-
Vanguard Real Estate ETF (NYSEMKT: VNQ)
Like all Vanguard ETFs, these are passive index funds, all of which have low investment costs. The most expensive of the three (the real estate fund) has an expense ratio of just 0.13%, meaning $1.30 in fees is charged every year for every $1,000 of assets. And all three invest in a wide range of stocks that offer investors broad exposure.
The Vanguard Value ETF owns 342 different stocks, the top holdings of which are including Berkshire Hathaway, BroadcomAnd JPMorgan Chase. The Russell 2000 ETF invests in 2,000 companies, none of which represent more than 0.41% of the fund’s assets. And the Vanguard Real Estate ETF offers exposure to more than 150 REITs, with large positions in rock-solid market leaders like Prologis And American tower.
A bold prediction
For an investment to double over a five-year period, it must deliver a total return of about 15% annually. This would be significantly higher than the long-term average of the S&P 500, which is 9%-10% depending on the exact period you look at. But the valuation gap between these groups of stocks and the S&P 500, combined with the tailwind of falling interest rates, could certainly make this happen.
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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Matt Frankel has positions in Berkshire Hathaway, Prologis, Vanguard Real Estate ETF and Vanguard Russell 2000 ETF. The Motley Fool holds and recommends American Tower, Berkshire Hathaway, JPMorgan Chase, Prologis, Vanguard Index Funds – Vanguard Value ETF, and Vanguard Real Estate ETF. The Motley Fool recommends Broadcom and recommends the following options: long January 2026 $180 calls on American Tower, long January 2026 $90 calls on Prologis, and short January 2026 $185 calls on American Tower. The Motley Fool has one disclosure policy.
Prediction: These three Vanguard ETFs will double investors’ money within five years was originally published by The Motley Fool
