Two Vanguard ETFs Ready for Significant Growth

Investing in the stock market can be quite simple, thanks to the rise of exchange-traded funds (ETFs) over the last few decades. These financial products offer an efficient way to achieve diversification across different sectors or to concentrate on specific investment strategies.

One of the key advantages of ETFs is their cost-efficiency. While the average expense ratio for ETFs stands approximately at 0.52%, Vanguard ETFs generally charge much lower fees, typically around 83% less than this average, making them ideal for budget-conscious investors.

In this article, we will look into two specific Vanguard growth ETFs that seem well-positioned for exceptional returns over the next five years.

Vanguard Small-Cap Value Index Fund

The Vanguard Small-Cap Value Index Fund (VBR 4.48%) focuses on mid-sized companies with a median market capitalization of $7.5 billion, searching for those perceived as undervalued according to the fund's selection criteria. This fund aims to mirror the performance of the CRSP U.S. Small-Cap Value index and offers a very attractive expense ratio of only 0.07%.

Historically, the Vanguard Small-Cap Value Index Fund has generated an annualized return of 8.94% over the past ten years. The fund comprises shares from 835 companies across various sectors of the economy. Noteworthy holdings include Smurfit WestRock plc in sustainable packaging, Builders FirstSource Inc., a leading provider of building materials, and Booz Allen Hamilton, recognized for its expertise in technology and analytics.

Although the fund has performed acceptably in 2024, it hasn’t matched the impressive gains of the S&P 500, primarily due to the strong performance of large-cap stocks, especially in technology and biopharmaceuticals. However, as the Federal Reserve continues to lower interest rates, the economic climate may become more favorable for smaller, growth-focused companies.

Decreased interest rates can lead to lower borrowing costs for businesses, encouraging expansion and investment. At the same time, reduced rates can spur consumer spending, benefiting smaller companies reliant on domestic demand.

Additionally, companies within the Vanguard Small-Cap Value Index Fund have an average annual earnings growth rate of 12.9% over the last five years, indicating robust earnings potential. Their average price-to-earnings (P/E) ratio stands at 16.1, significantly lower than the S&P 500's average P/E ratio of around 27.3. This presents an opportunity for price appreciation as the market begins to recognize their growth potential.

Vanguard Growth Index Fund

The Vanguard Growth Index Fund (VUG 2.47%) targets mega-cap companies, with a median market capitalization of $1.4 trillion, that exhibit strong growth potential. This fund is designed to track the performance of the CRSP U.S. Large Cap Growth index and has an expense ratio of just 0.04%. Over a decade, it has achieved an impressive annualized return of 15.1%.

Currently, the fund holds shares in 183 companies, many of which are prominent players in the technology sector. Major holdings include well-known firms like Apple, Microsoft, and Nvidia.

This technology-focused investment strategy has allowed the Vanguard Growth Index Fund to slightly outperform the S&P 500 this year. Over the last 10 years, this fund has delivered total returns of 319%, assuming that all distributions were reinvested in a tax-advantaged account. In comparison, the S&P 500 returned 243% over the same timeframe, showcasing the fund's impressive growth profile.

While the Vanguard Growth Index Fund comes with risks typical of growth investing, it has consistently demonstrated strong performance in both rising and declining markets. Its focus on high-growth companies makes it a suitable option for investors looking for substantial gains, and the ultra-low expense ratio enhances its appeal by allowing investors to retain more of their returns over time.

Potential for Outstanding Returns

Both the Vanguard Small-Cap Value Index Fund and the Vanguard Growth Index Fund present promising opportunities for investors seeking to boost their growth investments. With their low cost structure and significant growth potential, these Vanguard ETFs are well-positioned for market-beating returns.

The Vanguard Small-Cap Value Index Fund is tapping into favorable conditions as interest rates decline, which could stimulate spending and investment in smaller firms. Given its lower average P/E ratio compared to the S&P 500, these undervalued stocks offer considerable room for growth as the market catches onto their potential.

Conversely, the Vanguard Growth Index Fund concentrates on large-cap companies with strong growth prospects, particularly within the tech sector. As innovation drives economic growth, these companies are likely to outperform the market. The fund's historical performance further supports the outlook that it could exceed the performance of the S&P 500 over the next five years.

ETFs, Investing, Growth