Got an extra couple thousand bucks you know you won't be needing anytime soon, but you aren't quite sure what to do with it? Put it to work in the stock market, of course. And just to ensure your investment is a true buy-and-forget-it forever holding, your best bet is a broad-based exchange-traded index fund, or ETF. These are just large baskets of many different stocks, providing you with permanent diversification that's automatically maintained for you by someone else.
To this end, here's a closer look at two ETFs from the Vanguard family of funds that you might want to consider buying for yourself sooner rather than later -- presuming you already own something like the Vanguard S&P 500 ETF(NYSEMKT: VOO), which is based on the S&P 500(SNPINDEX: ^GSPC) index. While an S&P 500 index fund reflects the collective value and movement of about 80% of the U.S. stock market and is still your best first foundational equity holding, some strategic ETF picks made right now could spice up your overall returns just a bit.
Over the course of the past several years, growth stocks have absolutely trounced value stocks. And understandably so. We've seen incredible strides on the technology front, like artificial intelligence and mobile connectivity, in recent years, which have proven lucrative for lots of companies categorized as growth names. Value stocks and their underlying companies haven't necessarily done poorly during this time, to be clear. They just couldn't hold a candle to the gains growth names were making.
As the old adage goes, though, nothing lasts forever. As this economic growth cycle matures against a backdrop of higher interest rates (and therefore higher borrowing costs), don't be surprised to see value stocks start to shine compared to growth stocks again.
Image source: Getty Images.
That's not a prospect based on a mere timing-minded gut feeling, either. Franklin-Templeton Funds portfolio manager Sam Peters and his analytical team did the number-crunching, finding that "valuation spreads [between growth and value stocks] have rebounded to historic highs, with value stocks now trading at the 91st percentile relative to growth stocks." He adds, "We believe that such excesses are not sustainable, and that such depressed valuations represent an incredible store of latent energy to power returns once value stocks begin their eventual rebound."
It shouldn't take much longer to see this pivot unfurl. Peters concludes that "the debate within markets is intensifying to the point where a new value cycle should crystalize" and that it "will take hold sooner rather than later."
There are several ways to position for this impending shift, but the Vanguard Value ETF(NYSEMKT: VTV) is arguably one of the easiest and best.
Based on the Center for Research in Security Prices' CRSP US Large Cap Value index, the fund holds a stake in every single major value stock available to U.S. investors -- a little over 300 tickers. Yet, unlike most growth funds these days, this one's very well balanced. No single name makes up more than about 4% of the ETF's total assets.
This fund is also cheap enough to stick with for the long haul. Its annual expense ratio is a mere 0.04% of your investment's value.
For now, take dividend growth over dividend yield
The other Vanguard ETF you might want to make a point of scooping up at this time is the Vanguard Dividend Appreciation ETF(NYSEMKT: VIG).
At first blush, this pick seems awfully similar to -- even if not identical to -- the Vanguard Value ETF. It also seems relatively risky in light of the fact that interest rates are rising, pushing bond yields and dividend yields higher by virtue of pushing bond prices and stock prices lower. It would be naïve to dismiss this potential pitfall.
Neither worry is quite concerning enough to not take on a stake in this particular exchange-traded fund, though.
As for its similarity to the value fund, only three of these two ETFs' top-10 holdings overlap. That's largely because Vanguard's Dividend Appreciation fund is built to mirror the S&P U.S. Dividend Growers index, which requires at least 10 consecutive years of annual per-share dividend increases for inclusion, something a surprising number of names categorized as value stocks haven't accomplished.
Regarding the risk that rising rates pose to dividend-paying stocks, don't read too much of that risk into the picture either.
OK, if it was an instrument like the Vanguard High Dividend Yield ETF(NYSEMKT: VYM) that prioritizes payout yields over quality stocks, the prospect of higher interest rates might be more concerning. That particular equity ETF trades more like a bond in that it's more subject and sensitive to even the slightest ebb and flow of interest rates.
Vanguard's Dividend Appreciation Fund is measurably different, though. While it is dividend-oriented, its stock-selection regimen ultimately finds quality companies capable of growing their yearly dividend payouts for long stretches of time. End result? A better net-performing basket of stocks, when combining the reinvestment of their growing dividends with these tickers' capital gains. Mutual fund outfit Hartford's actually done some extensive research on the matter, determining that since the early 1970s, S&P 500 stocks with consistently growing dividends produce an average yearly gain of just over 10% versus an average annual net gain of less than 5% for non-dividend payers. And ironically, since 1930, it's actually the market's second-highest quintile of dividend payers -- not the top quintile -- that outperformed most often.
What gives? Hartford's research analysts conclude this disparity is ultimately rooted in sustainability or lack thereof. They go on to explain these most rewarding dividend-paying companies have also "historically exhibited strong fundamentals, solid business plans, and a deep commitment to their shareholders." Which makes sense.
Interested investors should also know that Hartford is particularly bullish on dividend stocks right now despite tariff-induced turbulence, suggesting that sky-high corporate profitability and near-record-low dividend payout ratios bode very well for this sliver of stocks.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard Dividend Appreciation ETF, Vanguard Index Funds-Vanguard Value ETF, Vanguard S&P 500 ETF, and Vanguard Whitehall Funds-Vanguard High Dividend Yield ETF. The Motley Fool has a disclosure policy.
