VBR

Here's My Favorite Vanguard ETF to Buy Right Now -- and It Isn't Even Close

Count me in as a fan of exchange-traded funds (ETFs). A significant percentage of my investment portfolio is invested in several ETFs. I especially like Vanguard's funds because of their low costs.

Vanguard currently offers 86 ETFs. Several of them are good picks. However, I think one stands above the rest. Here's my favorite Vanguard ETF to buy right now -- and it isn't even close.

My hands-down favorite Vanguard ETF right now

If you asked Warren Buffett what his favorite Vanguard ETF is, he'd probably tell you he likes the Vanguard S&P 500 ETF. His Berkshire Hathaway portfolio owns this ETF. Buffett's will also stipulates the cash his family inherits be invested in a low-cost S&P 500 index fund. The legendary investor recommended Vanguard's.

I agree that VOO is a solid choice for investors. But my hands-down favorite Vanguard ETF right now is instead the Vanguard Small-Cap Value Index Fund ETF (NYSEMKT: VBR).

As its name indicates, this Vanguard ETF focuses on small-cap value stocks. It currently owns 856 U.S. stocks across 11 sectors. No stock makes up more than 0.78% of the fund.

VBR isn't Vanguard's biggest ETF based on assets under management. That honor, as you might expect, goes to VOO. However, VBR is still one of the top 100 biggest ETFs, managing over $55 billion in assets.

Why I like this ETF

Take a guess which asset class has performed the best over the long run. I'll give you a few hints. It's not bonds. It's not real estate. It's not large-cap growth stocks. If you answered small-cap value stocks, pat yourself on the back.

Small-cap value stocks have outperformed other asset classes in part because their higher risk warrants higher returns. However, the diversification of VBR helps mitigate this increased risk to some extent. Another factor is market inefficiency: Analysts don't cover smaller companies as closely, which can contribute to disconnects between the companies' intrinsic value and stock price.

I especially like VBR right now because entering 2024 small-cap value stocks were trading almost 20% below average while large-cap stocks were trading between 10% and 20% above average. This gap shows up in the price-to-earnings (P/E) multiples of VBR and VOO. The average P/E for stocks in VBR is 14.5 compared to an average P/E of 26.1 for VOO. We're due for a reversion to the means.

Small-cap stocks also tend to be more sensitive to interest rates than large-cap stocks. A recent survey of economists predicted a rate cut in September. Whenever the Federal Reserve lowers rates, it should provide a nice catalyst for VBR.

Finally, VBR has a low annual expense ratio of 0.07%. The average expense ratio of similar funds is 1.12%, according to Vanguard. The ETF's dividend yield of 1.99% adds icing to the cake.

One potential concern

There is one potential fly in the ointment. My bullish view about VBR over the near term assumes that the U.S. economy remains strong. However, an escalating conflict in the Middle East could rattle the stock market and the economy. Small-cap stocks are usually hit harder than large-cap stocks during downturns.

This concern doesn't change my long-term optimism about VBR one bit, though. I full expect this Vanguard ETF will perform well over the long run because I'm confident that small-cap value stocks will perform well over the long run.

Should you invest $1,000 in Vanguard Small-Cap Value ETF right now?

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Keith Speights has positions in Berkshire Hathaway, Vanguard S&P 500 ETF, and Vanguard Small-Cap Value ETF. The Motley Fool has positions in and recommends Berkshire Hathaway and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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