You wouldn't try to drive a nail in with a screwdriver. Likewise, you wouldn't try to use a hammer to screw one part into another. The right tool depends on the situation.
It's a similar story with Vanguard exchange-traded funds (ETFs). Vanguard offers 88 ETFs to investors. Some stocks are best in certain market conditions, but not in others.
Which are ideal right now, and which are not-so-ideal?Here are two Vanguard ETFs to buy and one to avoid.
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2 Vanguard ETFs to buy
In today's market environment, I think two Vanguard ETFs stand out as particularly strong. One is Vanguard S&P Small Cap 600 Value ETF (VIOV 0.52%);The other is Vanguard Small Cap Value ETF (VBR 0.03%). As the name suggests, both funds focus on stocks with small market capitalizations and attractive valuations. However, they are not exactly the same.
The Vanguard S&P Small Cap 600 Value ETF seeks to track the performance of the S&P Small Cap 600 Value Index. The index includes the S&P SmallCap 600 stocks with low price-to-book, price-to-earnings, and price-to-sales multiples. The S&P SmallCap 600 index includes 600 small companies in the United States. The Vanguard Small Cap Value ETF seeks to track the performance of the CRSP U.S. Small Cap Value Index, which also focuses on smaller U.S. companies with lower valuations.
One of the key differences between these ETFs is how they define which companies are small. The Vanguard S&P Small Cap 600 Value ETF has an average market cap of $2.8 billion, while the Vanguard Small Cap Value ETF has a market cap of $7.5 billion.
Vanguard Small Cap Value ETF owns 836 stocks. This is a larger portfolio than the Vanguard S&P Small Cap 600 Value ETF, which holds 460 stocks.
All Vanguard ETFs are generally cost-effective compared to competing funds, but some are cheaper than others. The Vanguard Small Cap Value ETF has an annual expense ratio of 0.07%, which is lower than the Vanguard S&P Small Cap 600 Value ETF's annual expense ratio of 0.11%.
Why these Vanguard ETFs are going up
Over the long term, small-cap stocks have outperformed large-cap stocks. And small-cap value stocks outperform all other equity investments. This historical track record is one good reason to buy these two Vanguard ETFs.
Indeed, large-cap stocks have been bigger winners overall in recent years. However, things have changed completely in recent months. why? I think one of the factors is simply that the difference in valuation between large and small stocks has become too large. A regression to the mean may have begun.
Another important reason to buy these two Vanguard small-cap value ETFs now is that the Federal Reserve is finally starting to lower interest rates. Small-cap stocks tend to perform better when interest rates fall.
Additionally, tariff increases may be on the horizon. President-elect Trump has promised to impose tariffs of 10% to 20% on all imports into the United States, and significantly higher tariffs on imports from some countries. These tariffs could benefit some small and medium-sized businesses. Also, because many small businesses have less exposure to international markets, they would be less vulnerable to retaliatory tariffs imposed by U.S. trading partners. These factors can make small-cap stocks more attractive to investors compared to large-cap stocks.
One Vanguard ETF to Avoid
As 2025 approaches, these two Vanguard ETFs should be good choices for investors, but another Vanguard ETF should probably be avoided. Vanguard Ultra Short-Term Bond ETF (VUSB 0.04%). This ETF owns short-term investment grade bonds.
Why avoid this Vanguard ETF? When interest rates fall, bond prices rise. However, the price of long-duration bonds increases more than short-duration bonds. As a result, investors may find long-term bond ETFs more attractive than Vanguard very short-term bond ETFs in the current market environment.
Keith Speights has a position in the Vanguard Small Cap Value ETF. The Motley Fool has no position in any stocks mentioned. The Motley Fool has a disclosure policy.
