ETFs
2 Vanguard ETFs to Buy Hand Over Fist Before It Happens
These two interest-rate-sensitive Vanguard ETFs are best buys right now.
When short-term interest rates rise, small and mid-cap stocks tend to underperform benchmarks like the S&P500. For what? Let’s break it down:
- Borrowing costs: Many small and medium-sized businesses fuel their growth by borrowing money. When interest rates rise, borrowing costs increase, impacting their profitability and risk profile.
- Well Capitalized Large Cap Stocks: Conversely, large-cap stocks – typically well-capitalized giants – often thrive in high interest rate environments. They rely less on borrowing and can resist rate increases more effectively, making them safe havens for investors.
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The catalyst: anticipated rate cuts
Although the Federal Reserve may stick firmly to cutting interest rates due to persistent inflation, experts predict a series of rate cuts over the next 12 to 18 months. These rate cuts could serve as a powerful catalyst for small businesses that rely on loans to expand their operations.
Two best Vanguard exchange traded funds (ETFs) are expected to be the biggest beneficiaries of lower interest rates in 2025. Read on to learn more about these low-cost Vanguard ETFs.
Vanguard Small-Cap Index Fund ETF Shares
THE Vanguard Small-Cap Index Fund ETF (V.B. 0.13%) aims to follow the CRSP US Small Cap Index, made up of American companies with an average market capitalization of $7 billion. This small-cap ETF is an ideal vehicle for gaining exposure to this market segment due to its ultra-low expense ratio of just 0.05% and respectable yield of 1.45%.
Over the previous five years, VB generated average annual returns of 7.74%. The fund has underperformed the S&P 500 over this period due to the 16-year bull market in large-cap U.S. stocks. However, small caps have always been the best growth vehicle for long-term investors.
Total return level VB data by Y Charts
The VB is exceptionally well diversified, with approximately 1,417 securities spread across all major economic sectors. Nonetheless, Vanguard rates the fund as “aggressive” based on its risk rating scale, reflecting the high dose of risk associated with stocks in general, and small-cap stocks in particular.
Vanguard Mid-Cap Index Fund ETF Shares
THE Vanguard Mid-Cap Index Fund ETF (VO 0.06%) closely follows the US Mid-Cap CRSP Index, which measures the returns of mid-sized U.S. companies. VO has a tiny expense ratio of 0.04% and an above-average yield of 1.59%.
This mid-cap fund is considerably less diversified than its small-cap counterpart, holding just 329 stocks in its portfolio. However, the average market capitalization of the portfolio companies is $31.3 billion. The inherently larger size of the companies within VO’s portfolio, relative to this portfolio, provides an additional level of security.
On the ledger performance side, VO generated an average return of around 9%. Despite this fairly healthy average annual return, this mid-cap fund has significantly underperformed the S&P 500 over this period. A turnaround in interest rates should favor VO relative to this benchmark in the years to come.
Final Thoughts
Before interest rates change, investors need to position themselves wisely. Consider the VB and VO ETFs as potential additions to your portfolio ahead of this catalyst. These low-cost Vanguard ETFs provide diversified exposure to small- and mid-cap stocks, allowing you to capitalize on a wide range of interest-rate-sensitive growth stocks.
George Budwell has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard Index Funds-Vanguard Mid-Cap ETF and Vanguard Index Funds-Vanguard Small-Cap ETF. The Motley Fool has a disclosure policy.