This Top Vanguard ETF and its 1,413 holdings are poised for a bounce. Here’s why:
Small-cap stocks have been underperforming the market, but that could change as investors start paying attention to value stocks.
If you ask investors what has driven the broader market over the past few years, you’ll probably get a variety of answers, including growth stocks and companies making money through artificial intelligence (AI).
While these themes have certainly contributed to the rally, the more complete answer is large-cap stocks.
Despite last week’s sell-off in growth stocks, there were many places in the market that performed well. And it may be surprising to learn that sectors like industrials and energy, led by income and value stocks, are hovering around record highs.
Companies that generate positive cash flow and do not rely on debt are generally better protected from high interest rates and inflation than smaller companies. So it’s no surprise that small-cap stocks underperformed. S&P 500 Recently, by a large margin. The S&P 500 is up more than 19% during that period. Russell 2000 (INDEXRUSSELL: RUT) fell more than 12%.
Here’s why: Vanguard Small Cap ETF (V.B. 0.54%) 1,413 holdings are the perfect recipe for a small-cap rally.
Image source: Getty Images.
small but powerful
What’s immediately noticeable about the Vanguard Small-Cap ETF is the number of holdings and the fund’s expense ratio of just 0.05%. That means an annual fee of $5 per $10,000 invested. Today’s low-cost exchange-traded funds (ETFs) allow investors to achieve low-cost diversification and invest in new things.
The ETF’s median market capitalization is just $7.3 billion, which is much lower than that of, say, ETFs. Vanguard S&P 500 ETF (NYSEMKT: Flight)The average market capitalization is $224.7 billion.
The Vanguard Small-Cap ETF’s top 10 holdings account for less than 4% of the fund, so they are smaller than the S&P 500 or Nasdaq CompositeThis is where large technology stocks account for a large portion.
In this context, one of the great advantages of the Vanguard Small-Cap ETF is that it provides exposure to a variety of companies that would be nearly impossible to replicate without the help of an ETF.
Sector Analysis
Some of the ETF’s key holdings include companies you may have heard of, such as AI software companies. MicroStrategy, DraftKingsand Williams-Sonoma. However, the majority of the fund is focused on the value-oriented part of the market. Interestingly, industrials are by far the largest sector in the ETF. If you look at the fund’s holdings, you can easily see why.
sector | weight |
|---|---|
industrial goods | 22.5% |
consumer discretionary | 16.4% |
finance | 13.5% |
technology | 12.9% |
health care | 10.6% |
real estate | 6.9% |
energy | 5.6% |
basic materials | 4.1% |
utility | 3.2% |
consumer goods | 3.1% |
communication | 1.2% |
Data source: Vanguard.
Some good examples of stocks you can find in ETFs include: Wascois a company that distributes products such as air conditioners, heating, and refrigeration equipment. Another example is: Booz Allen Hamilton, consulting firm. There is also Casey’s General StoreIt is primarily concentrated in the Midwestern United States. Another holding is a home builder. paid brother.
These are relatively small companies that are leaders in niche markets across a variety of sectors. Watsco is a much smaller company than industry giants such as: united parcel service or caterpillar. However, it plays a big role in certain markets. Casey’s General Stores are much smaller. walmart or costco wholesale, so it typically doesn’t appear on the radar of investors looking to invest in large retail businesses. In this context, small-cap stocks are small compared to the rest of the market, but are still multibillion-dollar companies.
Because industrial sectors tend to have a lot of these types of companies, the Vanguard Small Cap ETF is a great fit for investors who like the value and income that the sector has to offer, while also seeking exposure to economic volatility. and potential benefits to the wider economy.
Preparing for a turnaround
One of the simplest reasons why small-cap stocks are good buys right now is that many of them are cheap. The average price-to-earnings (P/E) ratio of Vanguard Small Cap ETF holdings is just 18.2, and the average price-to-earnings (P/B) ratio is 2.4. By comparison, the average P/E ratio for Vanguard S&P 500 ETF holdings is 26.1, and the average P/B is 4.5.
Small-cap stocks deserve to trade at a discount to the S&P 500 because they lack the advantages they have over larger companies. Nonetheless, the P/E ratios of the Vanguard Small Cap ETF and the Vanguard S&P 500 ETF differ by about 30%.
If the market continues to sell off, investors may turn their attention to quality companies with better valuations, such as small-cap stocks that have been largely left out of the broader market rally.
Role in various portfolios
One of the reasons ETFs are better than individual stocks is that they allow you to achieve specific goals in your portfolio. For example, investors seeking greater exposure to AI could choose an AI-focused ETF. Or for investors looking for big, safe, dividend-paying value stocks. Vanguard Value ETF.
The Vanguard Small Cap ETF is perfect if you’re looking for hidden gem companies but don’t know where to start. Or if you’re looking for broken value stocks. Either way, the Vanguard Small Cap ETF allows you to easily and inexpensively open starting positions in 1,413 small-cap stocks.
Daniel Foelber has no positions in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale, Vanguard Index Funds-Vanguard Small-Cap ETF, Vanguard Index Funds-Vanguard Value ETF, Vanguard S&P 500 ETF, Walmart, Watsco, and Williams-Sonoma. The Motley Fool recommends Booz Allen Hamilton, Casey’s General Stores, and United Parcel Service. The Motley Fool has a disclosure policy.
