Vanguard is known for its low-cost ETFs, especially its extremely popular Vanguard S&P 500 ETF. However, there are dozens of great ETFs in Vanguard’s portfolio, and some of them could be very big winners over the next few years. Here are three, in particular, that are worth a closer look right now.
Small cap stocks have dramatically underperformed their large-cap counterparts for over a decade. Given the performance of mega-cap tech stocks in recent years, this isn’t too much of a surprise. As of Oct. 31, the average stock in the Russell 2000 small-cap index traded for a price-to-earnings ratio (P/E) of 16.9, while the typical S&P 500 stock had a P/E of about 27.
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However, there’s reason to believe the valuation gap could narrow over the next few years. For one thing, small caps are likely to be bigger beneficiaries of falling interest rates, as they tend to rely more on borrowed money than their large-cap counterparts and also could see increased investor interest as “safe” fixed-income assets become less attractive.
I’m extremely bullish on small caps over the next few years and have been building a position in the Vanguard Russell 2000 ETF (NASDAQ: VTWO) to capitalize on it. It has a minuscule 0.1% expense ratio and no more than 0.5% of assets are invested in any single company.
Dividend stocks tend to outperform in falling-interest-rate environments, and that’s especially true for those with above-average dividend yields. One top Vanguard ETF you can buy to invest in these companies is the Vanguard High Dividend Yield Index Fund ETF (NYSEMKT: VYM).
In a nutshell, this ETF has a 0.06% expense ratio, a 2.7% yield, and a portfolio of top-notch companies that pay above-average dividend yields. Just to name a few of the 536 stocks in the portfolio, top holdings include Broadcom, JPMorgan Chase, and ExxonMobil.
If the Fed continues to cut rates, this group could be a big winner. Even if it doesn’t, this is an ETF full of rock-solid businesses and would still be a great addition to your long-term portfolio.
Last but certainly not least, there’s a good argument to be made that the financial sector could be the biggest winner over the next several years. Not only would the falling-rate environment help lower deposit costs, but the incoming administration created arguably the best growth environment for banks in decades during its first term and could do the same this time around.
