I saw a meme on the internet this week. It had four shapes: a pentagon, a hexagon, an octagon, and a sharply declining stock chart called “portfoliogone”. This is gallows humor at its best.
Many investors might identify with the latest “shape” in that meme and want to step aside. However, I would argue that there is a Vanguard exchange-traded fund (ETF) that is suitable to buy in almost any market environment. And I can think of no better Vanguard ETF to buy during the current market sell-off than one in particular.
Behind the market decline
Before I identify this Vanguard ETF, we need to understand the reasons behind the market decline. Three factors in particular stand out.
First, the bull market has been largely driven by tech stocks focused on artificial intelligence (AI). Several of these stocks have fallen back in recent weeks for a variety of reasons, including high valuations and, in some cases, disappointing earnings results.
Second, investor concerns about a potential recession began to mount with the surprisingly poor July jobs figures. Only 114,000 jobs were added — 35% less than economists had expected. The unemployment rate hit 4.3%, the highest level since October 2021.
Third, the Bank of Japan raised interest rates, setting off a chain reaction as investors sold stocks to undo a multi-trillion dollar “carry trade.”
Possible Vanguard ETFs to Buy
These factors are increasing pressure on the Federal Reserve to cut rates in September. Several Vanguard ETFs are potential candidates to buy with this in mind.
Lower interest rates would be positive for real estate investment trusts (REITs) and other real estate-focused companies. Vanguard Real Estate ETF is a good option to invest in real estate shares.
Small-cap stocks also tend to respond well to rate cuts. Two Vanguard ETFs are great choices for profiting from a small-cap bull market: The Vanguard Small-Cap Index Fund ETF and the Vanguard Small-Cap Value Index Fund ETF.
As interest rates fall, bond yields fall. However, this also causes bond prices to rise. That would Vanguard Total Bond Market Index Fund ETF a good choice for investors.
The best choice of all
All of these Vanguard ETFs could do well in the current market environment. However, I think the best choice of all is the Vanguard Long Term Bond ETF (NYSEMKT: BLV).
While the stock market has fallen in recent days, the Vanguard Long-Term Bond ETF has risen. Why? First, bonds are typically viewed by investors as a safe haven during periods of stock market volatility. I believe this could give the Vanguard Long-Term Bond ETF an edge over the aforementioned real estate and small-cap ETFs if investor concerns about a recession persist.
Furthermore, long-term bonds tend to outperform short-term or medium-term bonds when interest rates fall. This makes sense because long-term bonds lock in interest rates at a higher level.
The Vanguard Long-Term Bond ETF holds 3,901 bonds with an average maturity of 13.7 years. Nearly half of those bonds (48.8%) are issued by the U.S. government, so they are considered very safe. Costs are low, with an annual expense ratio of just 0.04% compared to 0.83% for similar funds.
If the August jobs numbers improve and recession concerns abate, I suspect the Vanguard Small-Cap ETF and the Vanguard Small-Cap Value ETF will outperform bond ETFs. For investors looking for the best Vanguard fund to buy now, I think the Vanguard Long-Term Bond ETF is it.
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Keith Speights has positions in Vanguard Small-Cap Value ETF. The Motley Fool has positions in and recommends Vanguard Bond Index Funds-Vanguard Total Bond Market ETF, Vanguard Index Funds-Vanguard Small-Cap ETF, and Vanguard Real Estate ETF. The Motley Fool has a disclosure policy.
I can’t think of a better Vanguard ETF to buy during the stock market sell-off than this one was originally published by The Motley Fool
