Two Vanguard ETFs Poised for Strong Returns

For long-term investors looking for solid growth, two low-cost Vanguard growth ETFs stand out as exceptional options. These exchange-traded funds (ETFs) are designed to help investors diversify their portfolios while minimizing costs.

Investing through ETFs has become a popular method over the past few decades as they offer easy access to a range of stocks and bonds, allowing individuals to spread their investments across various sectors or focus on specific themes.

A significant advantage of Vanguard ETFs is their low expense ratios. While the typical ETF has an expense ratio of approximately 0.52%—which means investors pay $52 annually for every $10,000 invested—Vanguard's prices are often much lower, making them a worthwhile option for cost-conscious investors.

Let's examine two growth-oriented Vanguard ETFs that appear set to outperform the S&P 500 over the next five years.

A Promising Value Play

The Vanguard Small-Cap Value Index Fund (VBR) is focused on mid-sized companies with an average market cap of $7.5 billion that may be undervalued. The fund aims to mimic the performance of the CRSP U.S. Small-Cap Value index and is notable for its exceedingly low expense ratio of just 0.07%.

In the past decade, the Vanguard Small-Cap Value Index Fund has delivered an annualized return of 8.94%. The fund includes shares of 835 various companies across all sectors, including well-known firms like Smurfit WestRock plc in sustainable packaging, Builders FirstSource Inc. in building materials, and Booz Allen Hamilton in technology consulting.

While this fund has seen decent performance in 2024, it hasn't matched the breathtaking returns of the S&P 500 largely due to the explosive growth of large-cap tech and biopharma stocks. Nevertheless, as the Federal Reserve continues to cut interest rates, the economic atmosphere may turn more favorable for smaller, growth-focused companies. Lower borrowing costs could stimulate investments and encourage consumer spending, providing a boost for these smaller entities.

Furthermore, companies in the small-cap value category have achieved an annual earnings growth rate of about 12.9% over the last five years, indicating strong financial potential. With a lower average price-to-earnings (P/E) ratio of 16.1 compared to the S&P 500's P/E ratio of 27.3, these smaller companies could see their stock prices increase significantly as the market acknowledges their growth potential.

Overall, the Vanguard Small-Cap Value Index Fund presents an excellent avenue for investors interested in capitalizing on undervalued growth prospects at a remarkably low cost.

A Reliable Large-Cap Growth Fund

The Vanguard Growth Index Fund (VUG) invests in mega-cap companies with an average market cap of $1.4 trillion that show strong growth potential. This fund tracks the performance of the CRSP U.S. Large Cap Growth index and boasts an expense ratio of 0.04%, alongside a stellar 15.1% annualized return over the past ten years.

The Vanguard Growth Index Fund is composed of 183 companies, many of which lead in the technology sector. Some of its largest holdings include technology giants such as Apple, Microsoft, and Nvidia.

This focus on technology has allowed the Vanguard Growth Index Fund to outperform the broader S&P 500 index slightly in recent years. Over the past decade, assuming reinvestment of distributions in a tax-advantaged account, this fund has yielded total returns of 319%, significantly surpassing the S&P 500's gain of 243% during the same timeframe.

While the Vanguard Growth Index Fund comes with risks typically associated with growth investing, it has consistently shown robust performance, excelling in both rising and falling market conditions. Its focus on firms with exceptional growth potential makes it an attractive recommendation for investors willing to take on a bit more risk in search of higher returns. The fund's remarkably low expense ratio also allows investors to keep a larger share of their profits over time.

Why These Two Vanguard ETFs Might Outperform the Market

Both the Vanguard Small-Cap Value Index Fund and the Vanguard Growth Index Fund offer exciting opportunities for investors aiming to upgrade their growth portfolios. Both of these ETFs feature low fees and demonstrate a promising potential for significant long-term gains.

The Vanguard Small-Cap Value Index Fund stands to gain from a favorable economic environment as interest rates decrease, potentially enhancing consumer spending and investment in smaller firms. Its lower average P/E ratio, in comparison to the S&P 500, indicates that these undervalued stocks may have substantial growth potential.

Conversely, the Vanguard Growth Index Fund is tailored for large-cap companies known for their strong growth trajectories, especially in the technology space. As innovation continues to be a driving force behind economic growth, these firms are expected to outperform the market. The fund’s history of impressive returns supports the notion that it could exceed the performance of the S&P 500 in the next five years.

Vanguard, ETFs, investing