Good but not great. That’s the verdict for the Vanguard Small-Cap Value ETF (NYSEMKT: VBR) over the last five years. The exchange-traded fund (ETF) delivered a respectable total return of 65% during the period. However, its performance lagged well behind the S&P 500‘s total return of 103%.
So should investors pour their money into other ETFs instead now? Nope. Here are three reasons to buy the Vanguard Small-Cap Value ETF like there’s no tomorrow.
1. There is a tomorrow
What’s the most important short-term reason to buy the Vanguard Small-Cap Value ETF like there’s no tomorrow? There is a tomorrow. And it’s a very important day for investors.
The Federal Open Market Committee (FOMC) will wrap up its latest meeting on Sept. 18. It’s widely expected to announce the first reduction of interest rates since March 2000.
Several factors lead many to speculate that the Fed will cut rates. Inflation is moderating. Jobs reports are weakening somewhat. At his speech in Jackson Hole, Wyoming, in late August, Federal Reserve Chairman Jerome Powell noted both trends, stating, “The upside risks to inflation have diminished. And the downside risks to employment have increased.” As a result, Powell declared, “The time has come for policy to adjust.”
Why is a potential rate cut important for the Vanguard Small-Cap Value ETF? Smaller companies tend to be more sensitive to interest rates than larger companies. They often have to borrow more to fund growth. If the Fed cuts interest rates, look for small-cap stocks and ETFs (including the Vanguard Small-Cap Value ETF) to move higher.
2. There are years to reap the rewards after tomorrow
The long-term reason to invest in the Vanguard Small-Cap Value ETF is even more important than the short-term reason. There are years to reap the rewards after tomorrow’s potential rate cut. Over the long run, small-cap value stocks have been especially big winners.
Wellington Management published an analysis in January 2023 that showed small-cap stocks have outperformed large-cap stocks strongly and consistently over the long term. Since 1936, they have delivered an average annual gain of more than 300 basis points greater than large-cap stocks. Small-cap stocks have also delivered higher gains than large-cap stocks more than 69% of the time. Moreover, small-cap value stocks have historically delivered higher earnings growth and returns than other asset types, including small-cap growth stocks.
There are plenty of theories as to why small-cap value stocks have been big winners over the long run. For one thing, smaller companies don’t receive as much analyst coverage as larger companies. This can lead to pricing inefficiencies, especially with small-cap value stocks. Smaller companies have more room to grow than larger companies. Their higher risk premium can also lead to higher returns.
3. It’s a cheap and convenient way to own a big basket of small-cap value stocks
You could buy lots of individual small-cap value stocks. However, it would require a significant amount of time and energy to research each stock, determine the best alternatives, and then buy the stocks. Using a small-cap value ETF is much more easy and convenient. For example, the Vanguard Small-Cap Value ETF allows investors to buy 848 stocks in one fell swoop.
The main advantage of the Vanguard Small-Cap Value ETF over other funds is its low costs. This Vanguard ETF’s annual expense ratio is 0.07%, much lower than the average 1.11% expense ratio for similar funds.
There is a tomorrow — and it should be a good one for the Vanguard Small-Cap Value ETF. But the many tomorrows to come will likely be even better for investors seeking a cheap and convenient way to profit from small-cap value stocks.
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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.
3 Reasons to Buy Vanguard Small-Cap Value ETF Like There’s No Tomorrow was originally published by The Motley Fool
