There are plenty of myths about investing. One is that you need a lot of money to get started. Another is that you should try to time when you invest.
The reality is that you don't need very much cash to begin investing. And anytime is a good time to start if you're focusing on the long term.
You also don't have to be a wizard at picking individual stocks. Got $500 to invest? Put it in the following ETF.
Image source: Getty Images.
Think small, think cheap
Vanguard is well-known for its low-cost index funds. Warren Buffett even revealed years ago that he recommended in his will that his family invest most of the cash they'll inherit when he dies in a Vanguard S&P 500 fund.
The Vanguard 500 Index Fund ETF (VOO 1.00%) ranks as the third-largest ETF by market cap. However, there's another Vanguard ETF that I think is an even better pick right now -- the Vanguard Small-Cap Value Index Fund ETF (VBR 0.37%).
If I had to sum up VBR in just four words, they'd be, "Think small, think cheap." This ETF focuses on small-cap stocks. In particular, though, it owns small-cap stocks with attractive valuations.
VBR currently holds positions in 835 U.S. stocks with relatively equal weights for each one. These stocks, on average, have delivered annual earnings growth of 11.8%. They trade at an average price-to-earnings ratio of 11.5.
The average expense ratio of similar ETFs is 1.13%. VBR's annual expense ratio, though, is a low 0.07%.
How VBR has performed historically
If you look at VBR's historical performance, you might question whether it's a better pick than the better-known VOO. VBR's total return has lagged well behind VOO.
VBR Total Return Level data by YCharts.
VBR's annualized return since inception is 8.83%, which is a lower return than what you could have made investing in an S&P 500 index ETF. However, there are a few things to keep in mind that put this average in a different light.
First, VBR launched on Jan. 26, 2004. Twenty years might seem like a long time, but it's still a short period to get a feel for an ETF's historical performance.
Second, most of VBR's existence was during the longest S&P 500 bull market in history. Large-cap growth stocks have performed especially well, compared to small-cap value stocks over the last few years.
Third, if we go back to before VBR's inception, small-cap value stocks have tended to be the biggest winners. Wellington Management conducted an analysis that found small-cap stocks outperformed large-cap stocks more than 69% of the time since 1936, delivering gains that were, on average, 300 basis points higher. Small-cap value stocks, in particular, generated stronger earnings growth and returns than all other equity asset classes.
Why invest in VBR in 2024?
VBR is an ideal ETF to buy in 2024 for several reasons, and valuation ranks at the top of the list. Small-cap stocks overall are 17% below their average forward earnings multiple, while large-cap stocks are 15% above their average multiple, according to American Century Investments. I suspect there's a good chance we'll see a reversion to the mean.
The Federal Reserve has already signaled that several interest-rate cuts could be on the way this year. MarketWatch's Frances Yue recently noted correctly that "small-cap companies are more sensitive to interest rates." If rates go down, small-cap stocks could soar the most.
BMO's Yung-Yu Ma told CNBC in December that "2024 will be the year of small caps and value." He's exactly right, in my opinion. Now is a great time to invest $500 (or more) in VBR.
