“I recommend Vanguard’s.”
Warren buffett wrote these words in his 2013 letter to Berkshire Hathaway shareholders. The legendary investor had just explained why his will dictates that most of the money his family inherits must be invested in a low-cost S&P500 index fund. Buffett didn’t mind indicating his preference when commenting on Vanguard.
I think Buffett’s choice of Vanguard is a good one. However, with the S&P 500 trading at a high valuation, other exchange-traded funds (ETFs) within the Vanguard family could be smarter choices for investors. One Vanguard ETF in particular seems like a no-brainer purchase right now.
Everything energy
The Vanguard Energy Index Fund ETF (NYSEMKT: VDE) attempts to improve the performance of the MSCI US IMI Energy 25/50 index. The ‘IMI’ in the fund’s name stands for ‘investable market index’. The ’25/50′ refers to the index’s requirements that no more than 25% of assets may be invested in a single issuer, and that the sum of the weights of all issuers representing more than 5% of the ETF, may not exceed 50% of the shares. total assets.
The most important thing to know about VDE is that it focuses on everything related to energy. This ETF holds 113 stocks of companies involved in all aspects of the energy sector.
VDE’s top holdings include oil and gas giants ExxonMobil, Chevron, ConocoPhillips, EOG ResourcesAnd Marathon Petroleum. However, the ETF also owns significant stakes in other energy stocks, such as the oilfield services leader Schlumberger and natural gas infrastructure company Williams Companies.
Vanguard is known for offering low-cost funds. VDE is a good example. The ETF’s annual expense ratio is just 0.10%, much lower than the 0.99% average of comparable funds.
Why VDE seems like a no-brainer choice
As I mentioned earlier, the S&P 500’s valuation is high. The S&P 500’s cyclically adjusted price-to-earnings ratio (CAPE) (also called the Shiller CAPE ratio) is just a hair below 33 – almost twice the long-term average.
However, VDE is cheap in comparison. The price-to-earnings ratio is only 12.4. This attractive valuation is also not due to the slow profit growth. Stocks owned by the ETF have delivered an average earnings growth of 31.3% over the past five years.
VDE also offers a 30-day SEC yield of 2.71%. This yield is almost double that of the Vanguard S&P 500 ETF. Such a strong return means VDE doesn’t need to generate that much price appreciation for investors to enjoy solid total returns.
But I suspect that the stock price of VDE shall increase significantly in the coming years. Why? There is a threat of a shortage of oil supplies. Western petroleum CEO Vicki Hollub predicts an oil shortage by the end of 2025. She believes that crude oil reserves are not being replenished quickly enough.
Other oil industry executives agree with Hollub on the market dynamics. If they are right, oil prices are likely to rise in the second half of this decade. That’s bullish for energy stocks – and for VDE.
Use some brain power
Is the Vanguard Energy ETF Really a No-Brainer Buy Right Now? Investors should always use some brain power before buying stocks or ETFs. There are always risks to take into account. In the case of VDE, it is possible that the Chinese economy will struggle and demand for oil and gas will decrease. OPEC could also dramatically increase production.
However, I think the prospects for VDE look quite good. This Vanguard ETF offers an easy way to invest in a large basket of energy stocks that as a group are attractively valued and should have strong growth prospects.
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Keith Speights has positions in Berkshire Hathaway, Chevron, ExxonMobil, Vanguard S&P 500 ETF and Williams Companies. The Motley Fool holds positions in and recommends Berkshire Hathaway, Chevron, EOG Resources and Vanguard S&P 500 ETF. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
This Vanguard ETF seems like a no-brainer buy right now and was originally published by The Motley Fool
