The stock market is red hot right now. Many exchange-traded funds (ETFs) offered by Vanguard perform exceptionally well. Nearly half of Vanguard’s 88 ETFs have achieved a total return of at least 20% by 2024.
Some of these skyrocketing ETFs are no surprises. However, one Vanguard ETF that you might not think would be a big winner is near its all-time high. And it could rise even further.
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It makes sense that funds like the Vanguard S&P 500 Growth ETF and the Vanguard Mega-Cap Growth ETF are big. Investors continue to flock to seemingly any stock even remotely related to artificial intelligence (AI). They are especially optimistic about artificial intelligence (AI) giants. Nvidia, BroadcomAnd Oracle. Plenty of other mega-cap stocks that aren’t in the tech space, such as American Express And Walmarthave also made huge gains.
However, small-cap stocks have lagged behind large-cap stocks for years. Value investors have also seen the types of stocks they favor fall behind as investors have become excited about the sexier growth stocks. If you think this doesn’t bode well for the Vanguard Small-Cap Value ETF (NYSEMKT: VBR)who owns small cap stocks, you are right. As of July 1, the ETF is up just 0.33% year to date, while the Vanguard S&P 500 Growth ETF is up 24%.
But it’s a completely different story now. The Vanguard Small-Cap Value ETF has taken off in recent months. The ETF reached an all-time high in late November and is still near that level.
Most of the 836 stocks in this Vanguard ETF’s portfolio aren’t nearly as glamorous as Nvidia and Walmart. The top holdings include stocks such as Smurfit West Rock And EMCOR group. You probably won’t see much coverage on these stocks. However, many of them are gaining strength.
I think this momentum will continue, sending the Vanguard Small-Cap Value ETF much higher. This ETF has several tailwinds that are already blowing, or could soon.
Perhaps the most important is that the Federal Reserve has cut interest rates twice in the past three months. Small-cap stocks tend to be particularly sensitive to interest rates. Smaller companies are often more dependent on loans than larger companies. Lower interest rates translate into lower financing costs and higher profits.
There are also good prospects for deregulation in a second Trump administration. President-elect Trump has promised to remove ten existing rules for every new regulation that is added. If he delivers on this promise, it should be great news for smaller companies. Regulatory costs often hit smaller companies harder than larger companies. Trump’s proposed high tariffs on all imports to the US could also benefit many small businesses that compete with rivals based outside the US.
The other factor I think will work for the Vanguard Small-Cap Value ETF is the tendency for the valuation gap between small- and large-cap stocks to revert to the mean. In August 2024, the difference between the valuation of small-cap stocks and large-cap stocks was the largest since 1998 and 1999. Over the next eleven years, small-cap stocks outperformed large-cap stocks.
Small-cap stocks have historically delivered higher returns than large-cap stocks, by about 10% during the first twelve months after an initial rate cut by the Federal Reserve. Since 1936, small-cap stocks have outperformed large-cap stocks, while value stocks have outperformed growth stocks.
I think the Vanguard Small-Cap Value ETF is a good choice for investors in the new year. I consider it an even better choice in the long run. History is on the side of this Vanguard ETF.
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American Express is an advertising partner of Motley Fool Money. Keith Speights holds positions in Vanguard Small-Cap Value ETF. The Motley Fool holds positions in and recommends EMCOR Group, Nvidia, Oracle, and Walmart. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
This Vanguard ETF Is Near Its All-Time High — And Could Rise Even Further Originally published by The Motley Fool
