Prediction: These 3 Vanguard ETFs Will Double Investors' Money in 5 Years – The Motley Fool

Despite the rising interest rate environment and recession fears, the stock market continues to perform strongly: Over the past year, the S&P 500 has risen 24%.

But most of the strong performance has been driven by growth stocks, especially large caps. Value stocks, small caps, and real estate investment trusts (REITs) have all significantly underperformed the overall market. But I think that’s changing. Here I outline the poor performance, why the next few years will be great for investors in these markets, and three ETFs that could double your money over the next five years.

Three groups of underperforming stocks

Large cap stocks have been performing well for a long time, to say the least, and mega-cap tech stocks have driven much of the market’s rally. Here we compare the performance of the S&P 500, value stocks, small cap stocks, and real estate stocks over several different time periods.

Data source: YCharts. Performance as of 14 August 2024.

Catalysts on the horizon

There are several reasons for the difference in performance between these groups of stocks, including a surge in AI investments that has driven big tech stocks, but one big reason is interest rates.

Value, small-cap, and real estate stocks all tend to be more interest-rate sensitive than large-cap stocks. First, they tend to be more dependent on debt than the market’s largest companies, and benchmark interest rates affect their borrowing costs.

Additionally, stocks in these three groups are more likely to pay dividends (especially value and real estate stocks), and as funds have flowed out of the stock market in recent years into risk-free assets like Treasury bonds and CDs, stocks in these groups have been the primary victims of exodus. As interest rates fall and investors put money back into the market, these groups should benefit greatly.

The latest market expectations are that the Fed will begin cutting interest rates quite aggressively at its September meeting. Next In September, the Fed is expected to cut interest rates by a total of 2.25 percentage points. CME Group‘s FedWatch tool. And I think all three groups of stocks we’ve discussed here will be big winners.

The three ETFs I’m buying

You don’t need to buy individual value, small-cap, or REIT stocks to take advantage of these tailwinds. In fact, there are three ETFs that I’m buying or plan to buy in 2024 that I believe can double investors’ money over the next five years. These are the ETFs:

• Vanguard Value ETF (VTV 0.30%)
• Vanguard Russell 2000 ETF (V2O 0.30%)
• Vanguard Real Estate ETF (VNQ -0.06%)

Like Vanguard’s other ETFs, these are passive index funds, and they all have low investment fees — the most expensive of the three (the real estate fund) has an expense ratio of just 0.13%, which works out to $1.30 in fees for every $1,000 in assets each year — and all three funds invest in a diversified range of stocks, giving investors a wide range of exposure.

The Vanguard Value ETF holds 342 stocks, with the top stocks being: Including Berkshire Hathaway, Broadcomand JPMorgan ChaseThe Russell 2000 ETF invests in 2,000 companies, each of which represents less than 0.41% of the fund’s assets, while the Vanguard Real Estate ETF offers exposure to over 150 REITs, including some solid industry leaders. Prologis and American Tower.

Bold Predictions

To double your investment over five years, you’d need annual total returns of roughly 15%, which is significantly higher than the long-term average for the S&P 500 (9%-10%, depending on the time horizon). But the valuation gap between these stock groups and the S&P 500, combined with the tailwind of falling interest rates, means this goal is quite likely to be achieved.